What should be your strategy at Nifty 7500?
The week continued to put pressure on the market as a mix of a slowdown in China and weak oil prices continued to spook the markets. However, the Nifty seemed to find a range of 7400-7500 to consolidate and that is probably the good news. While it may be early days to call a bottom, the appearance seems to be like the markets are bottoming around this range. But index levels have a nasty way of surprising us and hence the larger strategy should be to focus on themes rather than index values.
The 2 big stories of 2016 …
The best of traders have never caught the bottom of the market. The smarter thing to do would be to look at themes to focus on. Two themes are likely to benefit from the government expenditure in year 2016. Firstly, the government is making a big push for the indigenization of defense. Quality defense stocks with superior execution skills will be one theme to watch out for. Secondly, the government is planning heavy investments in road infrastructure this year. Companies in the road building space are likely to benefit with their order books overflowing. These are the two sectors where focus should be on players with low leverage and high execution skills.
Try to find bargains at lows…
The carnage in the markets has led to most stocks correcting sharply in the last one year. On needs to be a little selective here. For example, PSU banks and capital goods stocks may have corrected sharply in the last one year. But the earnings visibility is missing in these stocks. Similarly, metals may be available at attractive valuations but questions over Chinese demand and global metal prices will remain. The idea will be to focus on dollar defensives that have corrected sharply. These stocks will benefit from the bounce back in prices as well as the strength of the dollar due to Fed rates trajectory.
Mid-caps could be the real story…
If you look at year 2015, the Sensex gave a return of -5%, while the mid-cap index returned 6%. But will that repeat this year? The story is something more fundamental. Mid caps are operating in spaces outside commodities and hence they are less susceptible to commodity prices or to Chinese demand. Secondly, most of the mid cap stocks enjoy low levels of debt and also low levels of capital. This ensures that financial risk is limited and also their growth directly translates into ROE. This is something that sets mid cap stocks apart. Of course, you need to be more discerning about the product strategy, market focus and the management quality here.
7500 may not be the bottom of the Nifty. But surely, there are pockets of opportunities that are clearly visible. The door is open for smart investors. ©
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