‘Difficult to say when the market will stabilise’

The economy is bottoming out. Things like demonetisation and GST are behind us now. There is stability in businesses with owners focusing on growth and management. In the next one to two years, we would see growth coming back to corporates. That is a very good sign. If you look at the capacity utilisation across the country, we feel we are nowhere close to the peak. We have seen good improvement but we still need to go a long way to reach the peak. This gives us the comfort that corporate profitability will continue to improve over a period of time and there would be benefits of this in terms of earnings.

While corporate profitability is expected to improve, there are macro challenges which are a cause of concern. There are basically two types of headwinds on the global macro front. The domestic political scenario is still uncertain; we don’t know what will happen with the government, whether policy stability will continue or not. If it continues, it is a good scenario to look for as a country. We would continue to see lesser disruption and more growth.

The second one is that of valuations; they are not on the comfort side. They are rather on the higher side, which means that a large part of the street is expecting improvement in earnings and stability of business. That, to some extent, is already priced into the stocks, valuations of mid- and small-caps are much above their historical means when compared to large-caps.

Volatility (in the stock market) will continue. Last year was a low-volatility year, but now it (volatility) has returned to the market and that, to some extent, is good, as it helps remove the froth which could have been created in certain pockets.

There are some risks associated with valuations and the geo-political situation. These headwinds are equally strong and may keep the markets volatile.

We find the overall market a bit more expensive compared to historical levels. It is difficult to say when things will stabilise. Either the market will correct immediately and we might see a price correction which makes it more comfortable or the market will go through time correction wherein we might see a scenario where earnings are growing but the markets are still unable to move and then valuations will automatically correct over a period of time.

We expect volatility to remain for a few quarters till the domestic political scenario clears. Unless the market gets some confirmation in terms of policy, we don’t see it stabilising.

We feel that it is better to stick to asset allocation fund for an investor looking to invest lumpsum money. Products in this category are Balanced Advantage kind of products where the equity level keeps changing with the change in market levels. We have observed in the past that when the market volatility is high these products tend to perform better.

In terms of sectors, we see consumption and pharma are two sectors which seem to be safer areas to invest in because there is very little impact of government policy making. Investors should try to stay away from sectors which are more government-oriented or dependent on government policy making such as infrastructure, road and rail. Those sectors are doing well now but the policy uncertainty risk is also far higher in these sectors. If there is a change in government policy then it can affect the sector.

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