A Matter Of Timing

Ali On Content / 21 Jun 2010

 Given the fact that the markets continue to be volatile, investors should look for a multi-asset class strategy for the next 18-24 months and depend on SIP as a trustworthy way to park their funds

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The strained balance sheets of the PIIGS countries required the support of approximately USD 1 trillion from the European Union to prevent a crisis. However, the austerity measures which come along with this support will reduce both public and private spending. Hence, growth in the Eurozone over the medium term would be weak.

This has resulted in increased risk aversion and we expect the market to continue to remain volatile. Given the correction, the Sensex at the current level is trading at around 15-15.5 times, 1 year forward. This is in line with historical averages. We feel that the scope of significant PE re-rating upward is low due to the increase in global uncertainties. Therefore, returns in the equity market will be in line with the earnings’ growth.

We were underweight on the metals sector owing to expensive valuations and global uncertainties. Given the underperformance of this sector vis-à-vis the broad market, in the recent market fall the valuations of select companies have become attractive. We would look to selectively increase weight in this sector. Structural issues have led to a roller-coaster ride in equity net flows for the industry in the last 18 months. However, investors need mutual funds and hence they are here to stay. The recent up-tick in equity NFOs may just reverse the trend in favour of the industry – distributors are eager to do business, fence-sitting investors are seeing relative low market levels now and manufacturers are slowly but surely adapting to the new regulations.

In such uncertain times, managing risk is as important as managing returns. Above all, asset allocation is ever-more important now. Past study shows that over 90 per cent growth in an investor’s portfolio comes from proper asset allocation, while less than 2 per cent comes from market timing. So, first, we would urge investors to asset allocate. Second, move to a dynamic asset allocation product versus one that is static to enhance the shock absorbing capability of their portfolio. Third, find an actively managed strategy versus one that is passively managed. This will enable the portfolio to adapt to rapid changes quicker. And, finally, be disciplined and not emotional and avoid taking ad-hoc decisions.

We are positive on the consumer discretionary sector (especially the two-wheeler and auto ancillary space). We are also positive on the industrials’ segment with an overweight on construction. We are positive on PSU banks given the attractive valuations compared to private sector players. We are overweight on upstream/down-stream companies in the oil & gas space. We are underweight on metals, FMCG and utilities. Given the significant correction in the metal stocks, we would look to increase weight in this sector.

Stock-picking this year would be the key to generating superior returns. We would also look to add alpha through sector allocation decisions. We do not take any significant cash calls in our funds. Investors should look for a multi-asset class strategy for the next 18-24 months. Being overweight in any one asset class can prove to be costly. SIPs are an evergreen strategy and investors should take advantage of the same.

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