What to Do?
Prospective investors require a solid combination of many deciding factors which help either meet or exceed their financial objectives, by the method of sticking to an investment strategy that is both efficient and disciplined regarding choosing and applying the proper investment options to use.
Under the present circumstances, where the midcap stocks are getting traded at valuations that are reasonable enough, they provide themselves as quite a compelling opportunity for buying.
How to Do?
Wealth creation through proper investment options must be seen as a journey, performed across a long timeframe and not merely a quick destination. To ensure the comfort of this journey, and that the destination is ultimately reached, the investor must be well prepared and adopt an approach that is disciplined and doesn’t look for shortcuts. This approach ought to be founded on an analysis of suitability, ascertaining the risks as well as requirements of return. The investor also needs to ascertain and arrive at a proper time horizon which helps achieve the planned investment objectives. The key to it all lies in sticking to the discipline mentioned above regarding the investment philosophy, despite downturns in the market and the cropping up of intermittent problems.
Investment Options to Become Rich
An investment philosophy that is well-defined must be able to provide for the reasonable deviations from the strategic allocations upon a periodic basis concerning the changes in the market environment in the macro and micro levels. The tactical changes must be thorough enough to make way for these changes, which must not be seen to be zero-sum. Instead, these ought to be treated like deletions or additions with regards to the strategic allocations at large. Additionally, emerging markets like India provide a reasonable fund manager that is alpha over the underlying benchmarks of the representative asset classes. Furthermore, selection of proper investment avenues tend to bring about certain levels of savings in tax. A right combination of all these factors would help the investors max out on their expected objectives, by maximizing the proper investment opportunities.
Based upon the proprietary model that takes into account the relative attractiveness of the five decisive factors, we can derive about six investment options/opportunities that are currently available in the marketplace for the creation of long-term wealth:
Stocks With Mid and Small Caps
The sell-off in markets that happened recently has managed to erode the valuation significantly in the premium which the stocks with small and mid caps have enjoyed over the stocks with a large cap. It has changed from the previous 40% to the current 6%.
Since midcap stocks are now getting traded at reasonable valuations, they happen to present buying opportunities that are compelling. Midcaps are now getting traded at reasonable earnings which are in the multiple of 16x. This can be compared with the five-year and ten-year averages, which are respectively 17.8x and 14.8x, on a forward basis that ranges for 12 months. These are supposed to garner an expected CAGR of 22% throughout two years.
The outlook for earning in this space is gradually improving with the quality of earnings getting reflected in the financial leverage as well as better operation. The current mandate by SEBI regarding fund categorizations and the stipulations that are made regarding allocations of the fund have made certain homogeneity. The risks, too, have been confined within the expected range with regards to the respective categories of the fund. As uncertainties keep receding and there is an improvement in business outlook, small and mid caps can be expected outperform in the medium term.
Fixed Income Credits That are High Quality
An increase in the oil prices which are coupled with the rising cost of global capital has led to flights in the portfolio capital since the starting of the year. The segment involving fixed income suffered a lot with the sell-off of FPI. Depreciation in Indian rupee, as well as interventions from the RBI, has further exacerbated the situation, which has led to much tighter liquidity. A combination of such factors led to the aversion of risk in debt markets. The investors are now pushing towards market instruments that are overnight. Therefore, greater yields can be seen in the credit bonds of high quality, with movements that is 9% upwards.
Because of the average inflation rate that is currently at 4%, the inflation expectations of the RBI at medium term being 5%, the policy rates being 6.5%, bond yields of high quality are currently getting traded at a basis point range of 200-250, above and over policy rates. This is quite a steep discount with regards to the historical averages of approximately 100-150 bps. While an excessive aversion of risk is suggested by the same, it may be estimated that improvements in risk and liquidity of the environment may soften yields. This may then provide the investors with an additional kick in the returns from fixed income. This occurs above the accrual returns that are earned traditionally.
Bank Stocks of Private Ownership
There has been an improvement in credit growth towards averages of longer-term by almost 14% while growth due to deposit continues to be trailing. Banks have resorted to borrowing by wholesale because of a lack of pricing power due to the stiff competition so far, coming from the NBFCs. As a result, NBFCs have seen rapid growth due to the cost of PSUs over the last five years. Now, liquidity gets tighter and severe deficit in trust has been seeping in the sector. Due to this, there has been a jump in borrowing rates of the NBFCs too. This provides a great opportunity for the private banks that do not possess the constraints in the capital, as do the PSU banks and the limitations in liability franchise as that of NBFCs. It may, therefore, be assumed that private banks would likely outpace financial segments at overall levels, while the players in possession of quality franchise as well as a base with robust liability would likely become the key beneficiaries amongst them. Evaluations of such banks have also been corrected from the earlier peaks. Therefore provide investors with investment opportunities that are quite compelling.
Stocks of Auto OEMs
The rising cost in vehicle ownership, as well as absence of any major new launch, slowed down the sales regarding automobile vehicles (both two and four wheelers) over the timeframe of the last three months. It can be assumed that policy thrust upon improving the rural incomes as well as ongoing expansion in the economic sectors would continue to fillip broader consumptions and thereby perpetuate structural shifts in the patterns of consuming. Such factors should provide the needed support to the auto sales across the medium term. By the sell-offs in the wider market, auto stocks have subsequently come under the pressure of selling as well. Moreover, there has been increasing intensity in the competition in the segment involving two-wheelers. This has therefore led to sharp corrections in valuations of such stocks. This can be seen as a good opportunity for entry, provided the outlook of healthy demand in the medium term.
Allocation of Global Assets
The rise in the expectations of a population that is upwardly mobile and the rapid changes in consumer trends increased the requirement of foreign currency. There is now the growing preference for global education almost immediately after graduating from college or even before, vacation plans involving foreign locations, which may even further evolve in family reunions in foreign destinations — these trends are all contributive towards a drastic increase in demand for the foreign currency.
About this phenomenon, the domestic currency is seen to lose its shine, mostly due to the nature that is inherent of the emerging markets. Apart from the needs of consumption, investment portfolios that are basic require a barrier from the currency depreciation that happens periodically, just as well. For this reason, investors may choose considering allocations in the global investment. Such allocations may be made in two methods. The first one would be through feeder funds, the route that is offered by the mutual funds of domestic nature without any restrictions. The second one would be through direct allocations that are made to external assets, up till the limits permitted by regulatory measures. This amounts to around USD 2.5 Lacs each year per individual. Such asset classes generally offer two separate sources of gaining. One such gain would be made through the performance of respective asset classes at the terms dictated by constant currency. The other would be through the performativity of currency translation.
Stocks Involving Emerging Market (EM)
Global asset allocation has now offered itself up to an investment avenue. Granular, bottom-up analyses of such spaces suggest that equities in the emerging market are more attractive in comparison to developed markets. Owing to the flight of capital and risk aversion, assets from the emerging market are not so much in favor. Therefore valuations are now relatively cheap. Along with markets, EM currencies have seen depreciation as well. The outlook of earnings in such markets has bottomed. They are now showing slow signs of improving. This, while combined with inversion in yield curves of global bonds would suggest that the monetary tightening would likely halt in the upcoming months. This may result in easing the concerns of the risk environment and rising capital cost. As corporate profitability and business environment improves, it may be expected that emerging markets would become the choice destination for global investments. Therefore, it may be assumed that risk rewards may lean in favor of emerging markets, from a perspective involving medium-term.