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Fine-tune your portfolio

The downturn in the stock market is a good time to review your portfolio. Here's how to do it.

twitter-logo Manu Kaushik        Print Edition: October 19, 2008

Blue Chip Investment Bank Lehman Brothers has gone bust; leviathan Merill Lynch has been forced into a marriage with Bank of America; and insurance giant AIG Inc. has effectively been nationalised by the US government- the global financial landscape has changed overnight. As the wires reported the catastrophe, the BSE Sensex fell 738 points (5.3 per cent) in three days (September 15-18) to 13,262.90. Since then, it recovered well to cross the 14,000-mark-only to fall back to

Revamp your portfolio
Financial experts recommend a portfolio that's in tune with the times.Those levels at the time of going to press. Implication: there's still plenty of fog in the air. Says Amitabh Chakraborty, President (Equity), Religare Securities: "It is difficult to predict when this will end; a lot more write-offs can happen. Across the globe, investors are selling equities. Over the next 6-9 months, some more big names may go the Lehman way." For Indian investors, this global financial crisis is both an opportunity as well as a time to introspect on their investment strategies. The investment climate is changing by the day. But if you follow a few measured steps and take cues from the current crisis, then you should be able to pull through and also set your portfolio up for the next upward cycle.

Leverage hurts
The crash in stock prices has hurt all investors, but those who had borrowed money to invest in stocks have been hit even harder. Says Manish Sonthalia, Senior Vice President (Research & Strategy), Motilal Oswal Securities: "For investors, the crisis has a lesson: don't over-leverage. When the going is good, leverage works fine, but when the tide turns, it destroys wealth equally fast." We are not out of the woods yet. The stock market seeks certainty and stability. But if there are going to be more multi-billiondollar bailouts, the market will get unnerved. Says Hemant Rustagi, CEO, Wiseinvest Advisors: "The crisis in the US has severely dented investor confidence and the market is likely to remain extremely volatile over the next few months."

Besides, the expected economic recovery in India will almost certainly stretch into the next year. Says Prateek Agrawal, Head (Equity), Bharti AXA Investment Managers: "The pace of recovery depends on the extent of proactive government policies and central bank action." But till such time the economy bounces back, the fluid global situation will keep the market on its toes.

Says Chakraborty: "Liquidity is a problem. The FIIs (foreign institutional investors) have been selling and domestic institutions have been buying, and, hence, India has outperformed other Asian markets. But if the global situation worsens, FII outflows can increase substantially."

Investors must closely monitor market movements, both domestic and global, and even measure company performances against their peers. Indian companies have strong fundamentals. Over the next few months, the market will be influenced by the corporate performance and earnings guidances. Says Sandeep Shenoy, Strategist, PINC Research: "The cautious approach of most investors could keep the market subdued or capped for another 2-3 quarters. But barring a few sectors, growth in earnings across companies will be robust. The market is expected to stabilise when these results are declared and that will signal the end of the bearish phase."

So, you should keep an eye out for the stocks you own and assess whether they will be adversely impacted by the global financial crisis or the slowdown. For instance, IT stocks may not gain much from the Indian rupee's depreciation as the US economy may cut-back on IT spending.

Bargain hunt
The ongoing global credit crisis has had an impact on other sectors like commodities, manufacturing and services. Says Suhas Samant, Head (Portfolio Management Service), Asit C. Mehta Investment Intermediates: "The recent fall in global markets has brought down energy and metal prices sharply. This could enable RBI to bring down inflation and frame easier policies on interest rates. This will ease the pressure on margins of companies."

The market is now throwing up good buying opportunities in certain sectors, and, hence, investors can bottom-fish for the long haul. Says Agrawal: "Defensive sectors like FMCG and healthcare are likely to outperform the market. Consumer demand is expected to remain robust due to the normal monsoon. The healthcare sector is not only defensive but may also benefit from a depreciating rupee." Analysts suggest that investors should stay focussed on large-cap companies, as they are more resilient to financial stress. Says Sonthalia: "For the short term, sectors that have lower earnings visibility and sectors that have huge capital requirements should be avoided. These include commodities, real estate and utilities." Investors should also stay away from interest ratesensitive sectors such as auto and banking.

But the fundamentals of the domestic markets remain strong. Says Shahina Mukadam, Head (Equity Research), IDBI Capital Market: "Fundamentals still support the fact that markets have bottomed out. However, despite this, investors may remain wary of the grim global situation." Clearly, the definition of risk has changed over the last few years, making it harder to predict trends. Many investors think that the market will only go up, and, hence, feel this is the right time to invest aggressively in stocks. Instead of putting 20-30 per cent of their investment corpus in equities, they may end up investing almost three fourths of their money in equities. This will be a big mistake. Says Rustagi of Wiseinvest: "One should design a well-balanced portfolio with investments in different asset classes. Rebalancing is more about risk than return. It is equally important to decide on a time interval, like once a year, and examine the portfolio then. If the asset allocation shifts a little, there is no need to bother. If it shifts by more than 5 per cent, one should re-balance it. This can occur naturally over time or following an abrupt rise or decline in one or more asset classes."

But any crisis gives you an opportunity to reshape your portfolio. If you can add to your holdings now little by little, and ride out the storm, you may have a lot to cheer about a few years from now.

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