Equity Strategy

Should you sell or buy specific stocks?

As the results for the fourth quarter start pouring in, there are a few key pointers that are emerging. Firstly, there seems to be a pick-up in volumes in key industries like automobiles, cement and telecom. That is a good sign, although it also needs to translate into profits. Secondly, since November, there has been a pick-up in exports, bank credit, IIP growth and manufacturing growth. These are signs of a stage being set for a long term re-rating of markets. Lastly, Indian valuations at 17-19 times forward earnings are hardly cheap by global standards. So what should your equity strategy be?

Not a time to panic and sell…

Valuations at 17-19 times earnings are hardly a sign of an underpriced market. That implies that the margin of safety may be fairly limited. But then is it the time to sell and exit? The answer is an emphatic “No”. With a 100 bps advantage that India has in terms of GDP growth over China, India will continue to attract FPI inflows. You typically think of selling out when growth is faltering and valuations are not supported by the growth rate or the ROE. Neither is the case today!

There are green-shoots visible…

Some key variables are showing distinct signs of turning around. Firstly, the IIP and the Manufacturing Index have shown a sharp turnaround since November last year and have been on an uptrend since. Secondly, the credit growth has sharply overtaken the growth in banking deposits in the last 4 months and that is a sign of better transmission and more efficient balance sheet management by banks. Thirdly, export fall has been stemmed and the forex chest of $365 billion is now sufficient to cover nearly 1 year of imports. This, combined with CAD at below 1% of GDP, imparts stability to the rupee. These green shoots indicate that apart from improvement in profit growth, India could also see an expansion in P/E. That is the story to play for.

Strategy: Be stock specific…

The broad idea is to try and be more stock specific in your approach. Firstly, mid-caps are likely to outperform the large caps by a margin and hence your portfolio needs to be weighed more in favor of these stocks. Secondly look at how specific companies are remodeling their businesses. Auto companies getting into defense, pharma companies with high ROE, construction companies on the cusp of an explosion in infrastructure spending etc could be ideal candidates at this point of time. Valuations at a macro level may not be too critical as long as the growth can justify the same. The focus must be on specific stories that are building up. Forget about selling out; it is the time to buy quality stocks selectively!  ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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