While, NIFTY is flat year to date, the broader market is in a serious Bear Market grip. NIFTY Mid Cap index is down close to 25% since the year beginning. NIFTY Small Cap index is down even more at 33%. That broader market is seriously struggling is also evident in the fact that not a single scheme of any of the larger fund houses has given positive returns this year. (Ref Annex)

 

Is it time for increasing Allocation to Equity Markets?

While, I see several risks to equity markets in the short term, such as:

• Rising bond yields in USA, that would not only suck money out of the emerging markets leading to further selling pressure in the Equity Markets, but is also likely to end the prolonged (9 Years) Bull run in USA
• Uncertainties arising out of upcoming state and then General Elections leading to weak coalition Government
• Worsening macros in India such as weakening Rupee with increasing CAD, rising inflationary pressure etc.
• With 10-year G Sec yield at over 8%, Indian Fixed Income markets continue to offer attractive investment proposition to Equity Markets

However, in the medium to long term Indian growth story remains intact. The risk is a weak coalition Govt of the regional parties at the center, which does not look like the central case. As India catches up with the rest of the world, GDP is expected to consistently grow at 7 to 8% clip or even better in the coming years.

If one removes the overvalued Information Technology (IT) sector from the index, rest of the market is trading at NIFTY levels of more like 9,800. At current market levels sectors like Banking, Auto, Oil & Pharma provides strong valuation support to the market.

As the new board (supported by the Govt) comes to grips with ILFS issues, and as the corporate earnings improve, driven by investment cycle revival, the market should first stabilize at current levels and then improve.

Keeping in view the overall risk reward perspective, I recommend increasing Equity allocation to 45% range, spread over Pharma, Auto, Banking Sectors. With G Sec yields at over 8.0%, remaining 55% of the portfolio continues to remain in Fixed Income Funds. Further if the yield increases to 8.3% to 8.4% yield levels, I intend to significantly increase duration in my Fixed Income Allocation.

ANNEXURE

LARGE CAP FUNDS (Absolute Returns – Year to Date)

• HDFC Top 100: -5.61%
• ICICI Blue Chip: -4.95%
• ABSL Frontline: -7.88%
• Reliance Large Cap: -6.7%
• UTI Master share: -4.2%
• Franklin Blue Chip: -7.21%
• Axis Blue Chip: -0.2%
• Reliance Vision: -22.2%

MULTI CAP FUNDS (Absolute returns YTD)

• UTI Equity Fund: -1.17%
• ABSL Equity FD: -10.30%
• Rel Multi Cap: -12.22%
• Franklin Equity : -8.75%
• HDFC Equity: -9.33%

MID CAP FUND Absolute Returns (Year to Date)

• HDFC Mid cap: -17.67%
• ICICI Mid Cap: -18.32%
• ABSL Mid Cap: -22.60%
• Reliance Growth: -18.82%
• UTI Mid Cap: -22.31%
• Franklin Prima: -15.75%
• Axis Mid Cap: -5.18%

VALUE ORIENTED FUNDS(Year to Date Absolute returns)

• HDFC Capital Bld: -9.52%
• ICICI Pru val disc: -4.26%
• ABSL Pure Value: -25.56%
• Reliance Value: -9.73%%
• UTI Value Opportunity: -5.50%
• Templeton Value: -17.18%