In a volatile market, investors should look at increasing their exposure at lower index levels, buy domestic-focused businesses and diversify portfolio to manage risk, Atul Singh, head of wealth management, Merrill Lynch Wealth Management, India, told Krishna Merchant. Edited excerpts:
In a volatile market, what is the strategy you recommend?
There has to be a mix of asset allocation across fixed income and equities and investors should be disciplined about it. Within equities, one can use the market environment to pick high quality companies and reduce risk in the overall portfolio. Investors can also play to the market conditions via tactical allocation. The Sensex has moved in the range of 16,000 to 19,000, which has been played out 8-10 times in the past 12 months. One can buy into and increase allocation to equities, when the Sensex hits 16,000 and book profits when it scales to 19,000.
What is the road ahead for the Indian markets?
Both the bulls and bears are at play, and there are significant headwinds - mainly global. Slow growth in the West will also start hitting exports. Valuations are reasonable and we do not expect equities to run away from here. The downside is also not that significant and the markets will continue to remain range bound for the next 6-12 months. Over a longer term period, some sectors will deliver healthy earnings growth.
Which sectors are likely to deliver a healthy earnings growth?
Domestically-aligned companies are likely to do better against those focused on export demand, because global growth has been downgraded quite considerably. Growth may falter in India also, but it is expected to be higher than other countries. Growth slowdown in China will have an impact on commodities; hence investors should buy companies which are consumer of commodities such as ITC and HUL, rather than producers of commodities.
The Reserve Bank of India (RBI) has hiked rates 12 times since March 2010 but inflation continues to remain stubbornly high. When do you expect the rate hike cycle to reverse?
Rates have been high for quite some time, but inflation has been persistent and we expect another 25 basis point (bps) rate hike in the next RBI meet. The interest rates will start softening only in the middle of next year.
Do you see downside risks to GDP growth? Will India lose out on premium valuations which it has enjoyed in the past due to this?
There can be a bit of a dent to the premium position which India has enjoyed in the eyes of investors. Going forward, investors will look closely at earnings growth which the companies will deliver. There will be a little sheen taken away in the entire BRIC block, including India.
How should clients hedge their portfolio against volatility?
Investors should reduce volatility or risk by diversifying their portfolio in various asset classes - gold, fixed income, equities etc. In equities, investors can reduce risk by bringing down the beta of the portfolio, by cutting exposure to mid and small-cap companies and putting money in high quality defensive companies. Also in the fixed income segment, investors can come down on the credit spectrum and reduce the risk by concentrating on high credit rating companies. Lastly, investors can buy protection by buying put option, which protects against downside; the only caveat is that buying hedge at this time would be expensive.
Given the volatility in gold and silver, should investors continue to allocate money to precious metals?
Gold and silver will bring the overall risk in your portfolio down from a diversification perspective. Gold does very well in inflationary environment especially in a country like India. In 2008 and in the last 6 months, there has been panic in global markets causing risk aversion and investors moving into dollar and gold. Investors should allocate around 5-10 per cent to gold.