What should I do with money? Focus on top up SIPs, large caps, says DSP MF

Fresh deployment through use of hybridslike Dynamic Asset Allocation or Multi Asset Allocation strategies asthey raise equity weights on lower valuations.

As market conditions continue to evolve, DSP Mutual Fund has analysed market conditions, and recommended asset allocation strategies for investors,  offering a cautious yet strategic approach to equity exposure, interest rates, and small and midcap stock trends.  Here's a breakdown of the essential market viewpoints shared by the DSP Netra team:

 

Equity Market Strategy: Shifting Toward a Moderate Stance

The investment strategy in equities is undergoing a shift from a conservative approach to a more moderate stance. While the time for aggression in the market may come, it is not yet time for high-risk decisions. Investors are advised to:

 

Increase Equity Exposure Gradually: One of the key strategies suggested is to raise equity exposure through dynamic investment options such as Dynamic Asset Allocation (DAA) or Multi-Asset Allocation (MAA) strategies. These strategies increase equity weights when valuations are lower, offering an attractive entry point.

 

Top-Up SIPs: Investors should consider topping up their Systematic Investment Plans (SIPs) to build long-term wealth. SIPs allow for disciplined investing and can capture growth even in volatile markets.

 

Focus on Large-Cap Stocks: For the time being, it’s wise to focus on large-cap stocks, particularly with staggered purchases. These companies have proven resilience and offer stability during uncertain times.

 

BFSI Sector - A Key Opportunity: The Banking, Financial Services, and Insurance (BFSI) sector, especially Private Banks, presents an attractive investment opportunity. Investors should consider adding exposure to this sector as it is expected to benefit from the ongoing market conditions.

 

Avoid Aggressive Small & Midcap (SMID) Exposure: While small and mid-cap stocks (SMIDs) have shown significant growth post-pandemic, the advice remains to avoid becoming overly aggressive in allocating to this sector just yet. Their valuations are experiencing a reversion to the mean, and earnings growth appears to be stabilizing. 

• Debt: DSP Converse

1. Remain long. Add spread assets (Corporate Bonds/Commercial Paper/Certificate of Deposit).

2. In near future, the liquidity surplus to benefit spread assets. 

• Commodities:

?-? All assets are cyclical. Gold, a proven store of value and strong performer, is a valuable portfolio addition.

?-? Silver is undervalued with respect to Gold prices. The Gold to Silver ratio is close to 88:1 versus its long period average of

65:1  How To Position Your Portfolio?

 

Interest Rates and Macroeconomic Factors: A Stabilizing Monetary Policy

Monetary policy is stepping in to fill the stabilizing role that fiscal policy once held. However, there could be delays before the expected interest rate cuts develop into a full cycle. Additionally, while the current interest rates may appear relatively high, they are not historically extreme. This suggests that:

 

Rate Cuts Could Take Time: If the Federal Reserve chooses to cut rates, the process will likely be gradual and executed with caution, balancing economic stability with inflation management.

 

Rising Aspirational Class: A growing aspirational class in India is becoming a significant market force. However, the reduced spending capacity among this group is leading to increased reliance on credit. This shift could affect the overall consumption pattern in the economy.

 

Growth Correction, Not Slowdown: While some economic indicators suggest a slowdown, it is more accurate to view India’s growth as correcting to its long-term averages rather than entering a prolonged period of contraction.

 

SMIDs: Valuation Reversion and Earnings Normalization

The market capitalization and profit contribution of small and mid-cap firms (SMIDs) have seen considerable improvement since the pandemic. However, there are important considerations for investors in this space:

 

Pre-Pandemic Doubts: Before the pandemic, SMIDs struggled with capital raising and faced challenges in growing their businesses. Their valuations were depressed as a result, creating a sense of uncertainty.

 

Post-Pandemic Re-Rating: The flood of liquidity and stellar earnings growth post-pandemic triggered a re-rating of the SMID universe, with valuations rising from a median multiple of 20x to as high as 40x. While this surge was driven by optimism and liquidity, it may not be sustainable.

 

Earnings Growth Normalization: As the post-pandemic earnings recovery cycle ends, a normalization of earnings growth is expected. This could lead to a reversion in SMID stock valuations back to their historical averages. As earnings growth declines, these stocks are becoming increasingly sensitive to market corrections, and their valuation multiples are beginning to contract.

 

The Road Ahead: Patience and Strategic Selection

In the current market environment, investors are encouraged to adopt a patient approach. The advice is clear: wait for the right opportunities to come to you, rather than aggressively chasing after investments. Opportunistic buying, particularly in undervalued sectors, is a more effective strategy. Buying when prices are lower often yields better returns in the long term, as opposed to purchasing at inflated levels when valuations are high.

 

Investors are also urged to recognize that while the earnings boom of the past few years may be winding down, it does not necessarily spell doom for the markets. Rather, a correction or a slowdown in earnings growth could signal the end of the high-growth cycle, and valuations will need to adjust accordingly.  Where The Opportunity Lies 

 

"Over the past six months, we've seen some of the froth in stock valuations getting washed away but not entirely. While certain pockets of the market are now trading near the lower end of their historical valuation ranges, many sectors still lack a significant margin of safety. We have taken the relevant valuation metric which can be used to measure a particular sector and not many sectors present opportunities providing higher margin of safety. Most of these are the sectors which were more popular in the post covid bull run (like PSU Banks,

Capital Goods)," said the report. 

 

Given current earnings trends and ROE levels, the  broader market still appears a bit stretched from a true value perspective. However, selective opportunities exist in segments like Financial Services companies (excluding PSU Banks) and Oil & Gas. In this environment, a more bottom-up approach may be the key to finding value