Position yourself for the next leg of up-cycle

Amid widespread scepticism, the equity market has rallied and is within the striking distance of its all-time high. Foreign inflows fuelled the rally, while domestic investors remained wary, and largely, missed out. Most investors were waiting for that elusive correction to buy into the markets, making the cardinal mistake of trying to time the markets.

Does it mean an investor who missed out should further compound his\her mistake by chasing the markets and taking the plunge at the present high levels? The conventional wisdom will advise you against it. However, we believe there is no right or wrong time to enter the markets. Opportunities exist at all levels/conditions.

Avoid chasing sectors that have already run-up sharply and outperformed the benchmark indices significantly. Analysis shows the rally is not broad-based. The bulk of the upside is driven by such sectors as auto, banks and fast moving consumer goods (namely, HDFC, ICICI, State Bank of India, Hindalco, ITC and Tata Motors out of the 30 stocks in the Sensex). Many stocks in these sectors are already trading at all-time highs and analysts are finding it tough to justify any further upgrade in price targets.

Typically, any fresh up-cycle is initially led by consumer-driven sectors, due to a revival in consumer demand and increased discretionary spending that kick-starts industrial investment or capex cycle. So, the next leg of the up-cycle is generally dominated by industrial and infrastructure stocks.

We believe it wouldn’t be any different this time too. Many frontline stocks in engineering, capital goods and infrastructure are trading at a discount of 20-40 per cent to their peak valuations seen in the last cycle, while many promising midcaps are available at fairly reasonable multiples of eight to 12 times forward earnings, despite strong growth outlook.

Having said this, not all sectors that have underperformed will outperform in the next leg. Similarly, there are pockets of opportunity in sectors that have outperformed the markets and appreciated considerably. For example, we believe the up-cycle in the commercial vehicle segment is far from over. So, commercial vehicles will continue to play and ancillaries to this segment look promising. In a nutshell, it will be better to position yourself for the next leg of the rally, rather than fret about losing out on the last one. Moreover, an investor needs to look at the volatility/choppiness resulting out of global uncertainties/issues as a buying opportunity.

The writer is CEO of Sharekhan