Tweak portfolio as equities may stay choppy

Investors on the eternal quest to invest between equities (stocks) and bonds (fixed income) will need to recalibrate their investments in the months to come.

Fortunately, there are some clear guidelines from experts on events that investors need to watch out for, to discern in which asset class to invest in.

“The return of Modi government and the Cabinet formation may see some euphoria in the stock markets,” says Vijay Kuppa, co-founder, Orowealth, about the possible contours of the Indian stock markets. But a correction in the equity space is on the cards, Kuppa says.

We have a possible trigger of when the downside in equities may start – the budget.

“Indian (equity) markets may remain buoyant till the forthcoming Budget is announced in early July,” says Deepak Jasani, head -retail research, HDFC Securities. “Post this, it may undergo a period of correction or consolidation.” This is of course barring any unforeseen global negative developments.

Domestically, poor corporate earnings, expensive valuations and similar macro stresses are the reasons why Indian equities will be under pressure.

Experts even opine where they expect Indian equity markets to go, in the near-term.

“It (Indian equities) may go up slightly to maybe 12500 points or so (on the Nifty), and then possibly come down to 11500 and maybe even 11200 points,” says Kuppa. The benchmark Nifty on Wednesday, was trading at 12020 levels.

“Earnings growth challenge will continue in the near term till the monsoons spread and intensity is assured and liquidity situation eases,” says Jasani. This will place pressure on the Indian equity markets. Other pressure points weighing in on Indian equities will be the global risk appetite, global interest rates trajectory, alternative investment avenues such as real estate, gold, and other global equity markets giving good returns and local earnings growth.

So how does the other side of the coin, debt and fixed income look?

“With a new government in place and an infusion of Rs 15,000 crore by the government in order to boost liquidity, bond prices are rising,” says Umesh Mehta, head of research, Samco Securities. This will cause the bond yields to decline further. In the bi-monthly monetary policy, the RBI is expected to reduce interest rates. “Hence, investment in bonds will be attractive,” says Mehta.

“The outlook for debt over the next three to six months is good,” says Kuppa, who expects yields to fall lower. In fact, currently you have an 18-month low in yields. If yields go lower, it means that bond prices are going higher. As your bond price increases, you will make more money by holding it.

“In the coming three to six months, the debt markets are likely to be stable and fare well and will continue to deliver stable returns to the investors,” says Jayant Manglik, president - retail distribution, Religare who expects 6-8% annualised returns on bonds. Jasani expects debt funds to give a return of 7-9% on an annual basis. During this period, equities are expected to have a rocky ride.

“Equity indices could remain volatile in the near term due to peak valuations and global uncertainties,” says Manglik, though there would be some exceptions in select pockets of quality large, mid, and small-cap counters, which are attractively valued with healthy growth prospects.

“While the equity market may increase in the short term, use every upside to reduce your excess exposure to equities,” says Kuppa. He does not recommend a full exit from equities as one will never know the final upside (peak) of the markets, but Kuppa does opine that towards 12500 points on the Nifty, investors should look at exiting stocks that are not part of their long-termportfolios.

So how do bonds (fixed income) look vis-a-vis the retail investor and what should be his/her policy for investing in this asset class?

“Investors should allocate a part of their portfolio to bonds and should take a balanced approach instead of a total concentration of their portfolio in equities,” says Mehta.

“If you are exiting equities, then debt (fixed income) is definitely where to look at your investments,” says Kuppa.

Within debt, there are certain segments that experts point out as suitable for retail investors.

“In case of debt mutual funds, we are more comfortable with short term funds (with the maturity of 1-3 years) and high credit quality fixed maturity plan (FMP),” Gaurav Dua, SVP head – capital market strategy, Sharekhan by BNP Paribas. Credit opportunity funds do not offer favourable risk-return ratio given the recent incidence of rating downgrades and not so comfortable exposure to debt from companies in the troubled sectors.

“Look at short term debt,” says Kuppa, who feels that longer tenure debt or corporate debt should be avoided as there may be some stress levels.

The exact balance between debt and equity will be a personal choice based on your risk appetite, age, investment priorities, etc.