A little over a week into March and you see the Sensex climb swiftly by over 800 points, or up by close to 4%. While you might think that the announcement of election dates simply triggered this rally, there appears more to the rally than meets the eye.
But we are not going into a political analysis here. We simply wish to find an answer to the question – Which sectors/stocks would stand to benefit the most pre and post elections? To know this, we did a quick exercise on what has been the choice of investors and institutions in the recent rally and how different is this move.
The current rally suggests that investors appear more discerning in their choice; and that encouraged us to take cues from the market. While they did go for under-valued stocks, the top gainers suggest that stocks that are over leveraged or have other management concerns have not mostly been in the toppers’ list. However, quite a few joined the party later.
Similarly, unlike earlier rallies, when companies flocked the markets to raise money through IPOs or placements, they have stayed away this time. They clearly seem to read that investors are in no mood to pick IPOs of companies that are desperate for funds. In fact, these companies appear to rather wait for a better equity environment to offload some of their assets to deleverage their balance sheet, is in contrast to what corporates usually do in market euphoria.
The recent rally clearly appears to suggest that investors are picky in their choice of stocks and sectors. A look at these sectors and you will see that – these sectors are under-owned, stocks in these spaces are undervalued, but not poor in ‘quality’, and there are policy initiatives that are already underway in some of these segments. Also, such initiatives cannot significantly differ, irrespective of which party rules.
Of course, there are also sectors that could directly benefit from a boost in investors’ sentiment, notwithstanding policy moves. We think some of the stocks in such sectors could continue to witness momentum, the election outcome notwithstanding (but we are not factoring a third front for this purpose), simply because the job at hand for any government would be to revive the investment cycle.
Such stocks are currently being picked from sectors such as banking and finance, energy, engineering and industrials, telecom and pockets of infrastructure, to name a few.
We dug deeper into these sectors to know what are the kinds of regulatory/policy initiatives that have been happening and what sectors could benefit simply from even a sentiment boost. Here’s what we found out:
- In the power space, there has been a gradual hike in tariffs to reduce losses of State Electricity Boards and aid their restructuring. Fuel supply uncertainty for power plants reduced after Coal India signed supply agreements.
- In the oil and gas space, rationalization of subsidy is underway, what with gradual increase in diesel prices over several months now.
- Export duty on iron ore and iron ore pellets has ensured better availability locally, keeping prices at bay for consuming industries.
- In telecom, spectrum auction and spectrum trading, irrespective of election outcome, can result in specific stocks becoming major beneficiaries.
- Continuing digitization policies in media could also boost specific stocks.
- At a more macro level, the number of coal mining projects given clearance has shot up post November 2013, after change in the Ministry’s head. Besides, a number of stuck infrastructure projects such as the power project of NTPC’s have been cleared by the Cabinet Committee on Investments.
Beneficiaries of Sentiment Boost
Besides, there are a few other segments that could be direct beneficiaries of a boost in investor sentiment:
- Currently, banks are weighed down by asset quality concerns that can be split into two – one from concerns that are more cyclical in nature – that is companies that are otherwise sound but suffering from the prolonged macro economic slowdown. Two, those weighed down by structural issues – fundamentally weak companies that borrowed and have turned bad quickly as a result of harsh external environment. We believe while the latter (structural) will be something that banks, especially public sector banks, will learn the hard way, a boost in sentiment could well reduce the asset quality concerns for banks laden with assets that have more cyclical issues.
- Engineering and capital good stocks of quality companies could be among the biggest beneficiaries when sentiments turn.
- Banks/finance companies with focus on infrastructure lending could once again see a revival in their fortunes.
- Select consumer discretionaries (which have been neglected for a while now), which may include retail chains or automobiles, may see an uptick in their fortunes.
How to Play
Now if you are an astute stock picker, it makes sense to look for specific opportunities. But for mutual fund investors, it is evident that some fund managers have already sniffed the opportunities and are steadily tweaking their portfolio, looking beyond elections.
Given the sector-specific opportunities we have stated, you may well think that we would come up with specific sector themes to play these opportunities.
However, at this point, given that economic indicators still remain weak, we would hesitate to go with sector funds from these segments (except Franklin Build India, which we covered a few weeks ago) at this juncture. The downside, if the strategy goes off beam, could be more painful with sector funds and may not also provide time to make a quick move to other opportune sectors.
Hence, we decided to fish for funds that had diversified portfolios with focus, in recent times, on sectors/stocks that benefit from policies/improving sentiments.
We had quite a few funds but decided to have a combination of dark horse plays, value picks and of course, predominant mid-cap focus and exposure to sectors discussed above, to build a 3-fund portfolio. The funds are HDFC Top 200, Franklin India Prima and ICICI Pru Discovery (we have at various junctures, reviewed these funds). We would go with equal exposure to these funds.
Please note that we prefer this as a portfolio holding (call it the ‘Revival Story Portfolio’, if you please!) as this would give a combination of stocks across market-cap segments.
For instance, HDFC Top 200, which is our dark horse play (after underperforming for a good part in 2013), will provide sufficient large-cap focus. Its overweight position in finance and energy can buttress its performance.
Similarly, Franklin India Prima’s overweight position in the engineering space and ICICI Pru Discovery’s focus in all the sectors (finance, energy, capital goods) we just mentioned, were key considerations behind our choice. The last said fund could also be one to provide some hedge to the portfolio in case of volatility.
Beyond sectors, the quality of stocks would ultimately help not just ride a rally, but prevent too much pain if fortunes prove otherwise. Hence,the ability to withstand downturns (HDFC top 200 being an exception) was a key consideration behind the choice of the other 2 mid-cap biased funds.
This portfolio is strictly for people looking for opportunities and willing to take risks. Also, if you are already laden with too many midcap funds, this may not fit you.
We will, of course, go with the SIP route to invest in these funds. However, if you can buy on dips in markets, you should consider such an option too, as we reckon volatility could well continue. Have a minimum of 3-year view on the portfolio and be ready to book profits in years of exceptional rallies. We will review this portfolio strategy if we feel the need for a rejig.
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