You know where the markets are headed. Now it's time to look at what stocks to buy. Money Today asked equity analysts and fund managers to identify the sectors, themes and stocks that are likely to outperform and suggest a portfolio of stocks or funds. Though their recommendations vary, the advice is common: don't jump into the market with all the cash you have. Systematic investing is the best way to go about it. Investing periodically (it can be monthly, quarterly or half yearly) does away with the need to time the market and prevents you from the vagaries of shortterm ups and downs in the market.
How much should you allocate to this asset class? Experts say this should depend on the risk one is willing to take, which, in turn, is a factor of your age. So, young investors (in 25-35 age group) should have at least 50 per cent of their savings in equity or equity-linked instruments. As one gets older, the proportion of equity investments can be gradually reduced.
It is always advisable to have a balanced mix of frontline large-cap and mid-cap stocks. It would be better for the first-timers to start investing in six to eight stocks in sectors that are likely to have a secular growth trajectory over the next few years. Take the stocks of private banks. As Indians loosen their purse strings, the growth in consumption will fuel the need for consumer financing. So, consider buying stocks like ICICI Bank, which has emerged stronger after the recent efforts to derisk its balance sheet. Similarly, power equipment is a good bet as the huge deficit that India faces will result in continued investments in the sector. Other sunrise sectors are infrastructure— it is a key focus in the upcoming five-year plan, so think of options like L&T and Bhel, and insurance. Max India is a good buy since its insurance subsidiary is among India's most profitable companies. Also worth considering are Bajaj Holdings, which gives an indirect exposure to the booming two-wheeler segment and the insurance sector, and Zydus Wellness.
Focus on small and medium companies
The markets offer ample scope for gains
The large-cap stocks of frontline companies are likely to do well, so investors can look at building a balanced portfolio with the following stocks. GAIL is sure to gain from the growing transmission volumes in the country. It also plans to enter 40 urban centres for city gas distribution projects—a high return on equity business. Given its strong client-mining ability, Infosys stands to benefit the most from the unfolding turnaround in the business scenario. In the banking sector, HDFC Bank is expected to fare better than the overall industry. Its loan book is expected to grow at over 26 per cent per year in 2009-11. Given the impetus to power financing, REC, which currently has a 16 per cent market share, is expected to witness a healthy 24 per cent annual average growth in 2009-11 profits. As for Bhel, higher orders from super-critical projects will help it post robust earnings in the future. The net cash per share of Hindustan Zinc is estimated to double from Rs 236 to Rs 460 by 2011-12. Tata Power has high visibility on capacity addition. Also, higher coal prices will buoy Bumi Mine's earnings, in which Tata Power has a 30 per cent stake. Finally, ITC, the dominant player in Indian tobacco industry, with an 80 per cent market share, is likely to benefit from its robust product portfolio and strong pricing power in the long run.
In the mutual fund space, DSP BlackRock Top 100 Equity Fund, HDFC Top 200 Fund, ICICI Prudential Dynamic Plan, Reliance Growth Fund and UTI Opportunities Fund are all good long-term investment options.
Time to catch the tide
Given that the Indian markets are likely to move up by 20-25 per cent by the end of the current year, this is a good time to invest in stocks. Many people are concerned about the current valuations. But these are not high relative to India's growth prospects and as this growth turns out to be better than expectations, the valuations will be adjusted on their own. Over the next 3-4 years, the Sensex is expected to hit 35,000-40,000 levels.
Driven by consumption and investment demand, India is likely to go back to a 9 per cent growth rate very soon. If agricultural growth goes back to its trend rate of 3-4 per cent, this growth rate will not be difficult to sustain. In turn, it will lead to huge investment inflows into the country. A big trigger will be the subdued global economic growth. Nearly 50 per cent of the world economy, including the US, Europe and Japan, is unlikely to participate in the next big upswing. Their shattered financial systems, low savings rates and high fiscal deficits will take years to repair. Over the next 5-10 years, the economic growth in these countries is likely to be under 2 per cent.
On the other hand, India will stand out during this period. A deluge of dollars seeking better returns will make its way to the developing economies with a potential for reasonable returns. In the boom years of 2006 and 2007, nearly 124 countries grew at over 4 per cent. In the next four years only a handful of countries will grow rapidly and countries like India and China will get a disproportionate share of attention and inflows. Being a barometer of the health of the economy, the stock markets should do well.
In short, we are in the midst of a strong bull phase and the Indian markets are looking good in terms of a one- to three-year perspective. Over the next 10-15 years, a huge amount of wealth is likely to be created via equity investing, so retail investors should not miss the opportunity. Don't forget, the genius of investing lies in recognising the direction of the trend, not catching the highs and lows.
"In the boom years of 2006 and 2007, 124 countries grew at over 4 per cent. In the next four years, only a few countries will grow rapidly and India will get a disproportionate share of attention and FII inflows."
- Sandip Sabharwal is CEO, Portfolio Management Services, Prabhudas Lilladher
An ideal portfolio should be built around the India growth story. This consists of multiple themes, such as consumption, asset creation, financial inclusion and technology innovation. The sectors that fit into the consumption themes are agriculture, FMCG, pharmaceuticals, retail and automobiles. Hence, stocks of Jain Irrigation, ITC, Cipla, Pantaloon Retail and Maruti Suzuki—leaders in their respective industries—are worth considering. The infrastructure space is poised for exponential growth, with India embarking on a massive investment of almost $1.6 trillion. The top picks in the asset creation theme are Bhel, L&T, IVRCL Infrastructure, Jyoti Structures, Tata Steel, Reliance Infrastructure and Reliance Industries. Given the poor penetration of banking services in India compared with the global average, the financial inclusion theme is gaining increasing importance. Moreover, banking and financial services are good surrogates for capturing the long-term growth in the underlying economy. Axis Bank, BoB, HDFC, Shriram Transport Finance and SBI are good bets. Remember that though these themes are likely to play out over the next few decades, the stock composition may not remain the same over the next 3-4 years.
A novice investor should consider buying low-risk equity, large-cap and balanced funds. Here are some suggestions for a model portfolio. Conservative investors can pick FT India Dynamic PE Ratio fund of funds. Then there are the consistent performers like Birla Sun Life Dividend Yield Plus, HDFC Top 200 and HDFC Taxsaver.
- Anil Rego, CEO and Founder, Right Horizons
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