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Nifty above Level 10,000: What next for the Index?


Posted on 17-Aug-2017 Comments  0

Even as we write this blog, the Nifty has been hovering precariously around the 10,000 mark. It is hard to put a number on the Nifty but we surely appear to be headed for higher levels. Prima Facie, it appears to be a matter of time before the Nifty decisively settles above the 10,000 mark. However, there are four things to remember at the current level of the Nifty…


  1. Focus on resilience not on bottom fishing…


Many investors have the natural tendency to gravitate towards stocks that have corrected sharply over the last few months and quarters. IT and pharma are two such examples. For example, most pharma companies are down more than 60% in value over the last 2 years. But that is not where investors should be focusing on. If you dig a little deeper,sectors like pharma and IT are actually going through structural challenges. These stocks could again become good ideas once they are able to address these basic structural challenges with alternative business models, not otherwise. The focus, instead, should be on stocks that have showed resilience in a volatile market. At the level of 10,000 Nifty, a good deal of volatility is quite obvious. But sectors like metals that have held their value in these volatile times would become the appropriate bets at these levels.


  1. Be cautious on high-debt companies…


In the last few weeks, many highly indebted companies like the Jaypee group, Bhushan, GMR and RCOM have seen rallies from lower levels.Even though the returns on these stocks may appear to be attractive for short term investors, it is better to resist this temptation.Remember, high debt stocks are most vulnerable to external shocks and are therefore most likely to lose substantial value. In fact, many of the high debt companies have debt levels that are a multiple of their market capitalization. Buying such companies at the level of 10,000 Nifty is definitely not a great idea. The focus should be on low debt, high growth and high ROE companies.


  1. Mid cap companies could still be the out performers…


Over the last 3 years, mid cap companies have outperformed the large cap indices by a fairly comfortable margin. Going ahead, the real value could still come from mid-cap companies, although you may have to be a lot more selective. The fact that the markets have held on to a positive Advance/Decline ratio on most of the days indicates that there is comfortable breadth in mid-cap stocks. But there are 3 basic things to remember here. Firstly, ensure that these mid-cap companies are having an established track record of profitability of at least 3 years before considering an investment in them. Secondly, mid-caps are more likely to derive the full benefits of the dividends of cheap oil as compared to large cap companies. With crude oil prices likely to remain subdued for some more time, focus on companies that will benefit from weak crude prices. Lastly, focus on mid-cap companies that are not too cash hungry. When a mid-cap stock performs well in the market and the price appreciates, the normal tendency in many cases is to leverage this value to raise more capital. Focus on companies that operate in sectors that are not too capital-hungry.More importantly, focus on companies that have shown the discipline on the capital raising front.


  1. Use risk management tools effectively…


The level of 10,000 Nifty is the time you must be seriously applying your risk management tools. Most advisors will try to convince you that this market still looks very attractive from a long-term perspective.They could be perfectly correct! But, that is not the point. Remember the famous words of John Maynard Keynes, “Markets can be irrational much longer than you and I can be solvent”. That means you cannot afford to be consistently wrong in the short run as it impacts your capital. The answer lies in risk management. Here are a few basic ways to do it…


Firstly,ensure that trading positions are backed by a strict stop loss. Even in case of investment holdings where you are sitting on profits, make it a point to use trailing stop losses to protect your profits.Secondly, when the market is becoming volatile, use put options to hedge your risk. You can buy a Nifty put option against your portfolio and hedge your risk at a very low cost of under 1% per month.


Remember,the level of 10,000 is not a time to worry. India is likely to see aspurt in growth in GDP and in corporate profits in the next 3-5 years. Additionally, nearly $70-80 billion of retail funds is likely to move into equities. The idea is to play the game right!

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