30% of equity allocation should be to US stocks: Emkay explains rationale

Emkay Wealth Management recommends a 50:50 allocation between equity and debt. Within the equity portion, they suggest dedicating 30% of the total equity allocation toward US stocks.

As the global financial landscape continues to evolve, investors should rethink their asset allocation strategies and look at the US market for portfolio diversification, according to Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services. 

 

An ideal balanced/moderate investor should look at a portfolio allocation of 50:50 equity and debt and within the equity allocation  have 30% equity in US stocks (15% overall ). The US markets provide good technology exposure, that is not available in India, as per Emkay. 

The rationale for this strategy is clear: the US stock market offers exposure to sectors like technology, which remains underrepresented in India. This diversification is expected to not only balance the portfolio but also provide access to high-growth sectors that could outperform in the coming years.

 

   

Asset Allocation Strategy: Equity, Debt, and Global Exposure

 

For balanced or moderate-risk investors, Emkay Wealth Management recommends a 50:50 allocation between equity and debt. Within the equity portion, they suggest dedicating 30% of the total equity allocation—equating to about 15% of the overall portfolio—toward US stocks. This move is particularly relevant given the technological edge of US markets, which offer exposure to sectors like tech and innovation that are not as prominent in Indian markets.

 

"US markets provide unmatched exposure to technology, which remains a critical growth driver," says Dr. Joseph Thomas, Head of Research at Emkay Wealth Management. "This diversification not only helps reduce risk but also opens up high-growth opportunities in sectors like artificial intelligence, cybersecurity, and biotech."

 

While equities are expected to outperform debt over the next three years, the current market conditions do present a tactical opportunity for debt investments. The Reserve Bank of India (RBI) is anticipated to ease interest rates in the coming quarters, making debt investments particularly attractive in the short term.

 

Monetary Policy and Market Outlook: A Positive Shift

 

The global monetary policy environment is also changing. Central banks in advanced economies, including the US, have already begun reducing interest rates, and this trend is expected to continue under the incoming Trump administration. These rate cuts are likely to channel funds from developed markets to emerging economies, boosting the attractiveness of markets like India.

 

"With the RBI expected to shift its policy stance to neutral and potentially cut rates by 25 to 50 basis points in Q1CY25, the domestic economy is poised for growth," says Dr. Thomas. "This easing will particularly benefit the housing sector, which has been under pressure due to high interest rates."

 

The inflationary spike in food prices is expected to be transitory, and with liquidity conditions remaining favorable, the growth outlook for India remains robust, with a 7% GDP growth forecast for the near future.

 

Valuation concerns

. With an estimated Nifty earnings per share (EPS) growth for FY25 of 7.9%, the Emkay team highlighted that while the Indian markets have experienced strong inflows, they are currently trading at expensive valuations, signaling the potential for market consolidation or time correction in the near future.

 

While the Indian market’s valuation has hit concerning levels, with the Indian listed universe’s market capitalization to GDP (M-CAP to GDP) ratio reaching a 15-year high of 140% earlier this year. This is a strong indicator that the markets might be overvalued, and investors should expect a period of consolidation or time correction as the market digests these elevated levels.

 

However, the Emkay team remains optimistic about the long-term potential of the Indian stock market. "Markets are likely to pick up once earnings growth materializes," said Parag Morey, Head of Sales at Emkay Wealth Management. He emphasized that while the short-term outlook may involve some corrections, the fundamentals supporting future earnings growth remain intact.

 

 The long term performance has been the best in Midcaps stocks.

 

Stock Picking and Active Management

 

The current market provides significant opportunities for stock pickers, especially in sectors with attractive valuations. According to Ashish Ranawade, Head of Products at Emkay Wealth Management, the market may not experience a broad-based rally, but there are certainly pockets of opportunity that active fund managers can capitalize on.

 

"Active fund managers are likely to outperform in this environment by identifying high-potential stocks and achieving higher alpha for their investors," Mr. Ranawade explains.

 

IPO Market: Moderation with Selective Opportunities

 

The Indian IPO market is expected to see some moderation as investors become more discerning, but companies with unique and innovative business models will still attract strong investor interest.

 

"While the IPO market is seeing increased activity, investors are becoming more selective," says Dr. Thomas. "In this dynamic environment, only companies with strong fundamentals and compelling business models will continue to draw attention."