We were in the midst of a global bull market wherein some indices, such as the Dow Jones, gained nearly 1,000 points in about ten to fifteen days. Indian markets, too, saw the best rally one month prior to the budget presentation in over a decade with the indices gaining around 6% in January 2018. Clearly, global markets have been overbought as of January.
The current correction seen in Indian equities is largely owing to the correction in global markets. That said, India remains a great structural story for the next 10 years.
It is difficult to say whether the markets can correct more or not because US markets have gone up continuously from 2009 to 2018. The biggest mistake most often investors do is to not focus on a proper asset allocation model.
In the Indian context, the small-cap and the mid-cap segments are overvalued. Hence, from a valuation perspective, one can consider investing in large-cap funds.
We are of the view the earnings cycle is yet to play out in India and the growth will come by over the next eighteen months.
Over the next 18 months, a marked improvement in corporate profitability is likely with the pick-up in capacity utilisation across sectors.
As valuations are no longer cheap, this is the time to exercise caution and adhere to asset allocation. Over the last two to three years, the markets have been on an uptrend and investors who came in then have not yet seen a down cycle. This can easily see them go overboard on equities, owing to the belief that equity is a riskless asset class, which is worrying.
In this backdrop, we suggest investors opt for dynamic asset allocation funds, which are much more defensive than pure equity plays. At the current juncture, we do not recommend small-and mid-cap funds.
Large-cap funds, dynamic asset allocation and debt funds (credit funds) are the three suitable picks to invest in at this point of time. Also, one should continue with their SIPs and not be wavered by market volatility.
We are bullish on infrastructure, power utility space, IT and pharmaceuticals.business-standard