An election-proof portfolio

With equity valuations attractive and interest rates high, investors need not worry, as they can counter volatility

IndiaNivesh Securities has identified a set of stocks - Cadila, Coal India, Mastek, Max India, Oil and Natural Gas Corporation, Hindustan Zinc and others - that will insulate the investors from a 'Modi or No Modi' scenario. IndiaNivesh isn't alone. A host of brokerages and wealth managers are busy working out investing strategies hat could ride the storm in the run-up to the polls and immediately after that.

While most recommend not too much tinkering for those who already have a portfolio, one can take some tactical calls. For someone (risk profile: moderate) building a portfolio, Rajesh Saluja, chief executive officer of ASK, recommends investing 50 per cent of the equity allocation now and the rest based on election results. "If the mandate is strong in favour of one government, one will always get opportunities to invest in the future. If there is a fractured mandate, the market will correct and there will be even better and reasonable opportunities," he says.

Ravindra Malani, director and head of equities, wealth & investment, India - Barclays, says they have a constructive view on both equities and debt. For, the valuations in equities are attractive and though the Reserve Bank of India is unlikely to cut rates in the near future, the current returns on debt instruments are attractive. In equities, one could go for a combination of domestic recovery plays and global opportunities. "We are also suggesting some exposure to international equity, especially the European region, as we believe the recovery is shaping well and the valuations are also attractive," he said.

According to Toral Munshi, head, India Equity Research, Credit Suisse Wealth Management, fixed income has been a key financial asset for ultra high networth individuals (HNIs) and will continue to be so in the next 6-12 months. Equities will only see an improvement in allocations if the market is able to sustain new highs, she feels.

Some are like Rahul Upadhyay, entrepreneur & founder, seniorshelf.com, who has been shifting to debt. He had put 70 per cent in mutual funds and 30 per cent in select stocks. In the past few months, he has been selling his stock portfolio and moved the money into fixed deposits. "I plan to start selling the mutual fund portfolio as well and move entirely into gold and fixed deposits as a tactical move. I will wait for elections to get over before making new allocations," he says.

Financial planners might not agree with this; they would typically advise retail investors to keep an eye on goals and not move money according to events. As Vishal Kapoor, general manager, wealth management, South Asia, Standard Chartered says, "The election is a very important national event but one should not make large swings to long-term asset allocation due to this."

However, even Kapoor agrees there might be some volatility before, during and after the elections. Which means investors might get an opportunity to either add more of an asset class because it has fallen or to book profits in asset classes that have risen because of the volatility.

Of the 50 per cent equity allocation now, Saluja recommends investing half of the allocation in large-cap companies (70 per cent) and in mid-caps (30 per cent). The parameters to take into consideration -- high return on capital employed, visibility of earnings growth and a strong balance sheet.

For debt, most experts agree investors should largely target the shorter end of the curve, as the longer end will see high volatility. The verdict on gold is almost similar. While Saluja avoids commodities, especially gold as it has no economic value, especially gold, Standard Chartered's Kapoor recommends a small two per cent.

'Existing investors should not make big changes'

Existing investors should not make any drastic changes in their portfolio, say experts. Says Vishal Kapoor, general manager, wealth management, Standard Chartered: "Long-term investors should be wary of taking large, tactical positions based only on anticipated election outcomes. Remaining disciplined and retaining focus on one's original investment objective is important, despite an environment that might be euphoric or overly pessimistic."

As election is a month-long exercise; there will be times when asset classes might swing from one end to another. So, if your existing allocation is conservative, with 50 per cent towards equity, and if the election outcome is not favourable and the stock market falls, add more equity and get your allocations back to its original levels. "Some investors might get an opportunity to either add more of an asset class because it has fallen or to book profits in asset classes that have risen because of the volatility," he adds.

Tactical shifts could be more speculative and investors could be at the losing end. So, avoid tinkering with your original asset allocation and keep your core portfolio for very long periods.