As we get closer to May 16, certain segments of the Indian market are reaching a fever pitch of optimism. Some may vehemently deny this. But when a tenth of the stocks in the CNX 500 double in seven months, mutual fund houses roll out a stream of new fund offers and IPOs of small theme-park operators attract a mad scramble from HNIs borrowing to invest, it is time to worry, even if only a little bit, about irrational exuberance.

But then, you may be told, the Indian market valuation, at a price-earnings multiple of about 18 times, is not really frothy. This valuation metric is fairly meaningless at this juncture, as stock prices in some cases are certainly factoring in the best-case scenario – a landslide victory for the NDA, a decisive majority for BJP and a flurry of instant reforms that pull infrastructure, realty, banks and a range of other cyclical sectors out of the quagmire.

If you own an equity portfolio and have just begun to look into its returns once again, this may be just the right time to take some profits, as even a mildly disappointing result may pop the bubble.

There are already signs of fatigue in some sections of the market. After pouring money ceaselessly into Indian stocks since September 2013, foreign institutional investor (FII) purchases of equities, which peaked at over $3.3 billion in March, waned to $1.59 billion in April and dwindled further to $0.24 billion in the first two weeks of May. Given that equity investing has only now begun to pay off after a long hiatus, we don’t recommend any panic moves, such as drastically cutting your equity exposure and moving into cash.

But you can capitalise on the more irrational aspects of this rally to clean up your portfolio.

Political heavyweights One set of stocks which have been steadily bid up in this rally without much aid from fundamentals are those belonging to business groups with a supposed nexus with ‘winning’ political parties. Thus, trading giant and flagship of the Adani group, Adani Enterprises, is up 200 per cent and the beleaguered Adani Power up 46 per cent in the last seven months, even as the more fundamentally sound Adani Ports is a more modest gainer. If you own the first two, it may be best to take profits on the stocks while the going is good, as a fundamental improvement, even with political help, may be some way off.

While pharma stocks, as a class, may not be a ‘sell’ yet, Aurobindo Pharma’s 194 per cent gain certainly seems overdone. In the infrastructure space, the recent mad run is a good exit opportunity from politically connected names such as Ramky Infrastructure, Reliance Infrastructure or a BF Utilities.

Lightening up on all the stocks with ‘Gujarat’ in their name would also be a sound move.

Risky bet Betting on the fact that the economic turnaround will coincide with falling interest rates (it is usually the opposite, rates are cut if the economy is sluggish), a whole group of highly leveraged companies and sectors have been massively re-rated. While it is conceivable that the economy may do better in 2014-15, there are absolutely no signs yet of a reversal in the interest rate cycle. Indeed, with the threat of poor monsoon, a US rate hike and a still shaky rupee, the RBI has given no hint of easing. This suggests that it is best not to bet your shirt on a dramatic turnaround in the fortunes of highly leveraged infrastructure, construction and realty names or even finance companies that are facing a margin squeeze. This suggests profit-taking in Simplex Infra, NCC, Aban Offshore, Suzlon Energy and the like.

De-risking moves Even if you don’t want to make too many stock-specific calls, it may pay to generally reduce the risk you are carrying in your portfolio through a simple rejig.

Why not look at those segments of the market which are likely to be most vulnerable to an election anti-climax and reduce your exposure to them?

For one, reduce your exposure to small-cap stocks (under ₹1,000-crore market cap), which will carry high impact costs if FIIs exit. Two, stocks heavily owned by FIIs – banks, infrastructure and construction, steel and power — may be the ones to give way first. Three, within the so-called defensive sectors, hold on to large-cap IT stocks but do trim your holdings in the expensive FMCG and mid-cap pharma names.

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