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So, the Sensex can, at best, rally by 6-7 per cent by FY18. Does this mean that investors should dump equities altogether? Not quite.
It is true that the Sensex gives an indication of the direction in which the market is headed. But it is wrong to assume that it is the representative of the performance of all companies in the market. Remember, the Sensex only consists of 30 stocks. In our analysis above we have listed out the drivers or challenges in key sectors and only a handful of stocks within these sectors find place in the index. Earnings trajectory, management style, business models and growth potential — all these have a larger role to play when picking stocks.
Sample this. Over the last decade, while the Sensex returned just 8 per cent annually, large-cap based mutual funds that invest in a wider basket of stocks have delivered 14-15 per cent return.
Within sectors, too, there is a wide disparity in the performance of companies. Take the case of heavyweight financials, for instance. If one had invested ₹10,000 each in stocks within the Sensex pack — Axis Bank, ICICI Bank, HDFC Bank, HDFC and SBI — five years back, the investments would be worth a little over ₹81,000 now. Instead, if one had picked stocks such as Bajaj Finance, YES Bank, IndusInd Bank, Sundaram Finance and LIC Housing Finance, the corpus would be worth over ₹2.8 lakh.
While investing in Sensex stocks and large-caps offers stability and reduces the risk of volatility, interspersing with a few quality mid-caps can help beat the Sensex over the long run.
Fishing for stocks within specific themes can pay off over the next two years. Aside from the passenger vehicle segment, the urban consumption theme has also worked well for players in the consumer durables/electronics or home-related segment.
Players like V-Guard, Bajaj Electricals, Havells India, Asian Paints and Kajaria Ceramics have delivered strong growth in earnings.
This theme is likely to play out over the next two years as well, though valuations may need watching.
With some signs of recovery, the order book for companies within capital goods has started to pick up. Selective picks in the power generation, road construction and banking sectors can also deliver healthy returns.
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