Just a sucker's rally

Don’t buy into it; instead realign, exit dud stocks and schemes, or stay put.

“The present rally could be a good time for risk-averse investors to reduce their exposure to equities," said Mumbai-based financial planner, Mukesh Dedhia.

With the Sensex rising over 800 points or almost five per cent in the last two days, Dedhia said such short bursts of rally can be used as good exit points for stocks when one is sitting on losses, especially in the case of mid- and small-cap stocks. In the past two days, mid- and small-cap indices have risen four per cent and three per cent, respectively. Some stocks in these segments have climbed 15 per cent.

Most market players believe this rally will not sustain because the problems plaguing both India and the world economies have not been resolved. So, the markets are expected to continue their downward journey, albeit with occasional spikes such as these.

Dedhia advised clients to be less aggressive on equities. "Say, you took 60-70 per cent exposure in direct equities. In the current uncertainty, this can be reduced to 40-45 per cent. At present, one could do with a little more dose of safety than growth. The market will always provide entry points but few exit points."

Jaganatham Thunuguntla, head, research, at SMC Capital, is more specific about exits. He said certain sectors such as real estate, infrastructure and bank stocks could be exited in the recent rally. "The rally in infrastructure and realty may not sustain, as mostly traders have invested with a short-term horizon. And, debt on real estate companies' balance sheets is keeping sophisticated investors away. Bank stocks could take a beating if interest rates are raised in the September policy, at least in the short term."

There could be other strategies as well. One could exit mid- and small-cap mutual funds that have not done so well. For example, this segment has returned -12.35 per cent in the last one year, whereas the large-cap funds have fallen 8.42 per cent.

The worst performers in the small-and mid-cap segment are down 31.51 per cent. In comparison, the worst performing large-cap fund has fallen 15.5 per cent, according to data from Value Research, a mutual fund rating agency. The recent spike has resulted in an improvement in their performance and investors can use the situation to move from small-cap to large-cap schemes, or even, debt products.

The above strategies are meant for ones who are either looking to realign their portfolio or exiting bad schemes or stocks. For others, who are unwilling to take a call, should stay put. Some analysts felt one could even enter at these valuations. Rajiv Anand, CEO of Axis Mutual Fund, said: "Market valuations are fairly compelling and this was a pretty good opportunity for long-term growth."

But if one is investing in direct stocks, the person should be selective, said Motilal Oswal, CMD of Motilal Oswal Financial Services. "Those who have a long-term view but don't want to lose money should consider defensive sectors like fast moving consumer goods and pharmaceuticals."

Most players are confident that this is a momentary event-based rally, which may end soon. "Therefore, it makes little sense to take a long-term call based on it. The best one can do is realign the portfolio, if there are duds to be got rid of. If you are investing through systematic investment plans, there is really nothing much to do," said a market analyst.