De-risk your portfolio: Sell potential underperformers
Riding the markets in recent times has become akin to sitting on a see-saw. After falling from its peak of 20,561 points on January 3, the Sensex has lost close to 11.5 per cent till date. But experts believe, it’s perhaps a good time to rebalance the portfolio and exit some overvalued stocks, which may underperform in times to come.
Says one foreign investment bank in its report, “asking investors to sell after a significant correction in the market (and 30-50 per cent in some stocks) may sound like locking the stable door after the horse has bolted”. But if investors have to buy fundamentally good stocks, available now at attractive valuations, it’s imperative to free up cash.
The report advises investors to move away from under-performers, which may suffer from potential administrative measures to control inflation. It is better to exit companies facing structural pricing pressure. For instance, upward pressure on interest rates impacts wholesale funded banks and financial institutions more than banks with strong deposit franchise.
According to analysts, HDFC, REC and PFC appear destined for more under-performance from this perspective. A second concern in the banking sector arises from potential credit cost increases. Also, banks having relatively higher exposure to the “risky” sectors (e.g. BOI in Airlines) and financial institutions exposed to generically risky sectors (e.g. REC and PFC in power utilities and distribution companies) appear to be candidates for under-performance.
India’s history of “moral suasion” by the government to control commodity prices in inflationary times is causing analysts to re-rate companies that don’t have backward raw material linkages. And in this category, JSW Steel and SAIL appear most vulnerable over the near term.
Apart from these, cement, power equipment, merchant power are sectors facing pricing pressure and are likely to suffer in the medium term. Some auto and consumer stocks (Hero Honda and HUL) are facing a much higher degree of margin pressure than their sector peers. So it’s worth it to re-assess these companies, which may not deliver the same high returns that they did in the past.