The week gone by was action-packed for equity investors, with the markets touching all-time high on Monday, seeing a sharp reversal on Tuesday, and marching steadily upwards since then to close Friday on a high.  The trailing 12-month PE (consolidated) of the Nifty now stands at 23 times, in line with the 10-year average but at a premium to longer-term averages. Stocks kissing new peaks, valuations not-so-cheap and a new coalition government at the Centre, how should investors approach the market now?

Earnings picture

Given that over the long term, stock prices catch up with earnings, what could lie ahead for the markets needs to be seen in the light of the earnings expectation for FY25. As per Bloomberg consensus, earnings per share (EPS) estimates for the Nifty stand at ₹1,100, a 11.1 per cent growth over ₹990 recorded for FY24. However, investors should note that 11 per cent growth in earnings expected for FY25 is much lower than the 20 per cent growth recorded for FY24. For a perspective, Kotak Institutional Equities, in its recent ‘Strategy’ report released in May, too estimates only a 9.1 per cent growth in FY25 earnings over FY24.

Despite lacklustre demand, low input costs aided bottom-line growth for India Inc for a good part of FY24. But with base effect catching up, a revival in demand will be a key monitorable for the markets in FY25. For instance, measures by the new government to put more money in the hands of the rural consumer in distress, as widely expected, could provide a boost to earnings.

That said, investors can approach the market today in the following ways:

1. Bottom-up stock picking

While the bellwether indices seem to be reaching new highs every few days, it is important to note that the breadth of the participation in the recent rally has been narrow. Be it the Nifty 50 or the Nifty 500, the accompanying charts show that many of the constituents still trade much below their all-time highs. Similarly, while valuations have expanded across the board, pushing more stocks into the 20<PE<50 and >50 PE zones (see charts), investors can look for value among stocks with decent fundaments, which haven’t participated much in the rally and/or available at reasonable valuations. UTI AMC, KNR Constructions, IndusInd Bank are some stocks which bl.portfolio recommended in recent months from this basket. Other names include banks such as HDFC and Kotak, NTPC, Power Grid, city gas distributors Indraprastha and Mahanagar Gas, Sun TV, Apollo Tyres, Ceat and PNC Infratech.

2. Playing the rotation

Some of the winning sectors of 2023, such as PSUs and realty, continued to be in the limelight this year until June 4. However, a look at the fall on counting day as well as the behaviour of key sectoral indices over the last few days (see chart) suggests that a sector rotation could be in place. While it is still early days, market’s focus now seems to be on the consumer goods space, given that it is a defensive segment in volatile/uncertain times, followed by pharma and IT, which too exhibit similar characteristics.

Banks too remain in focus, being on a fundamentally strong patch and reasonably valued. Seasoned investors who want to ride on some of these themes can consider sectoral funds which we have recommended in the related article here.

3. Passive investing

Investors with lower risk appetite, newbie investors, as well as those who don’t have the time to research stocks, can go for index funds. While the correction last week might not have lasted enough for you to act, corrections are endemic to markets and present themselves time and again. Keep powder dry to capitalise on such opportunities. Invest lump sums in index funds-based large-cap or mid-cap indices as elaborated in this linked article.

4. Book profits in overheated stocks

Even as you identify investible pockets, book profits in segments that seem overheated. With sector rotation already at play, some PSU stocks may give ample room to take money off the table. .bl.portfolio had recommended that investors book profits in RailTel and NHPC earlier this year, which has worked well so far, with these stocks underperforming the broader markets. While we did recommend a ‘book profits’ on IRFC, RVNL, Mazagon Docks in September last year itself, the stocks have continued to do well. If you still contiune to hold these, it may be a good chance to lock-into some gains today.

With a new coalition government taking charge, tapering of order flows, delays in execution, and change in policy or direction of spending remain risks to PSU stocks. Similarly, some in the capital goods/industrials space too are trading at rich valuations, buoyed by the push to manufacturing.

5. Asset allocation

Finally, keep in mind that equities should only form a certain percentage of your portfolio as per your age, risk appetite and time horizon, among other things. It is always wise to diversify into debt for stability and gold, which has negative correlation with equities over the long term. If you find your portfolio is over-allocated to equities, rebalance and move to debt. While shorter term debt funds are attractive today, select banks/top- rated NBFCs offer good rates on their FDs too.