How to invest in an uncertain market? Here is a defensive strategy by KIE

As the global economic environment faces increasing uncertainty, Kotak Institutional Equities has recommended some changes to its model portfolio to help investors navigate potential risks in the market. The portfolio has largely been defensive in nature due to the analysts’ cautious outlook, with heavy weight placed on sectors such as BFSI, healthcare services, pharmaceuticals, and telecom – industries considered stable and resilient during times of market volatility.  The KIE Model Large Cap portfolio looks like this:  

Notes:

(a) The model portfolio is not advise or recommendation or a suggestion for buying or selling securities as shown. It is only an indicative portfolio to show how a portfolio can be built. Please consult an expert to build your portfolio.

 

However, there are some important shifts being made in the updated portfolio. Kotak has added ABB (150 bps), following a steep 36% drop in its stock price over the past six months, bringing its valuations to a more attractive level. With a focus on the growing sectors of electrification and manufacturing, ABB is expected to remain insulated from the anticipated slowdown in government and household capital expenditure and muted private sector investments.

 

At the same time, there have been reductions in positions in M&M (100-200 bps) and Sun Pharma (50-150 bps), reflecting the analysts’ diminished outlook for these stocks in the current environment. These changes highlight Kotak’s strategic move to position the portfolio with more defensive and stable stocks while trimming exposure to higher-risk assets. 

The Indian stock market continues to trade at elevated valuations, a concern that Kotak has highlighted for some time. Despite higher global interest rates, increased geopolitical risks, and lower growth expectations across various sectors, the market remains pricey. The analysts stress that these high valuations, coupled with the looming risk of a synchronized global slowdown, could pose a significant downside risk to earnings in the near term.

 

Further complicating the outlook is the ongoing global trade tension, particularly with the United States imposing high tariffs on major trading partners. Kotak analysts are cautious about any short-term upside for India, especially if these trade tensions persist or escalate. The market’s current optimism, based on the belief that India could emerge as a “winner” from global supply chains shifting away from China, is seen as speculative at best. The complexities of global supply chains and the fluid nature of international trade agreements make any such predictions risky. 

The Uncertainty of Market Behavior in Response to Global Disruptions

Institutional investors face the difficult task of balancing the risks of geopolitical uncertainty and economic slowdown. Kotak warns that, while some may choose to ignore these risks, the increasing uncertainty may finally force a reevaluation of the market. As the analysts note, the heightened risks associated with trade tariffs, global inflationary pressures, and disruptions across various sectors should warrant a higher cost of equity, which would likely lower valuations and earnings expectations.

 

Retail investors, who have been significant buyers of equities in recent years, may also start to feel the pinch of this volatility. In recent weeks, some retail investors have begun selling, and Kotak speculates that the continued market instability could lead to further pullback in investor enthusiasm. The recent drop in trailing returns and the heightened market volatility could lead to a shift in retail investor behavior, potentially resulting in more cautious or panicked selling, especially if the market downturn extends.

 

What Should Investors Do?

Kotak’s advice is clear: adopt a defensive stance, reduce exposure to overpriced sectors, and focus on sectors with more stable and predictable growth. Given the current uncertainties, sectors like BFSI, healthcare, and telecom remain attractive, as they are considered safe havens in volatile markets. ABB, following its price correction, also presents a strong buy opportunity, thanks to its focus on the growing electrification and manufacturing sectors. 

How will the market perform? 

"The performance of the Indian market in the next few weeks will depend on (1) the response of various countries to the US’s reciprocal tariffs in the form of reconciliation or retaliation (China), (2) the behavior of retail and institutional investors and (3) the performance of other markets in a volatile setting. The Indian market has held up better so far, based on investors’ (1) denial of the increased geopolitical, global and domestic macroeconomic and sector-specific risks, (2) faith in a reversal in the tariff and trade policies of the US and (3) belief that India is relatively better off in the ‘reciprocal’ regime," said Sanjeev Prasad at Kotak Institutional Equities. 

Recommendations:

Adopt a defensive investment strategy: Focus on sectors with stable growth prospects such as BFSI (Banking, Financial Services, and Insurance), healthcare services, and telecom.

 

Reduce exposure to high-risk and overvalued stocks: Avoid sectors or stocks that are overly reliant on global growth and trade dynamics, especially those facing structural disruptions.

 

Diversify portfolios: Consider diversifying across asset classes and regions to mitigate risks associated with concentrated market exposure.

 

Monitor global developments: Stay informed about geopolitical events, trade policies, and economic indicators that could impact market performance.

 

Consult with a financial advisor: Given the complexity of current market conditions, it is advisable to seek professional financial advice before making any major investment decisions. 

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd