Take selective exposure to cyclicals

The past calendar yielded marginal gains for the benchmarks, though there was significant volatility during the period. Markets were influenced by US Federal Reserve taper concerns, rupee weakness (it has recovered from the lows, though), inflation/interest rate concerns, and finally, expectations on the political front. Slowing growth also kept market sentiment subdued. Within this, defensive sectors did well.

However, cyclical and investment-oriented sectors suffered due to lower growth and rising interest rates. Going ahead, we now know that the Federal Reserve taper will be put in action. However, the rupee's vulnerability to this has greatly reduced. On the other hand, growth and inflation remain a source of concern. There is uncertainty on the outcome of general elections. In such a scenario, fraught with concerns and uncertainty, one needs to look at the longer term rather than the immediate future.

Also, a balanced portfolio approach is advisable as compared to a concentrated one. We believe, one should be exposed to defensive sectors, which have better revenue visibility than the cyclical sectors, which are available at relatively low valuations. Within these, one should be focused on select stocks. Within the defensives, we like stocks in the Information Technology (IT) and Fast Moving Consumer Goods (FMCG) sectors. We also like select stocks in sectors like media and private sector banks. The IT sector is expected to see improved demand as developed economies like US and Europe recover and stabilise. Consumption demand is still growing, though at a slower pace.

The media sector is expected to benefit because of digitisation and higher political spending, ahead of the elections. We like private sector banks as these have relatively better asset quality and relatively higher margins. Valuations are generally higher for these sectors. However, one can find good quality stocks (including mid-caps) in these sectors, available at reasonable valuations. We have a cautious view on the cyclical and investment-oriented sectors. While some reform initiatives have been announced, companies have not indicated any major change in the ground realities.

Effective implementation of the initiatives will result in better prospects. Also, more needs to be done to revive investment interest. In these sectors, one should look at companies having credible managements and strong balance sheets The concerns over the next few months will be on the pace of the Fed tapering and on the outcome of the general elections in April & May. While an accelerated taper will impact liquidity flows into India, the absence of a clear mandate for any particular political party will be negative from the reforms perspective. This can have a bearing on the growth rates for the next financial year.

The author is head- private client group research, Kotak Securities