The premier equity indices have scaled new highs. The trend has already kindled fresh allocations, driven by expectations of a more formidable rally. Investors, enthused by what many perceive are green shoots in the economy, are looking forward to more.
A regime change in the world’s most powerful nation, the crawl-back of key indicators to pre-Covid levels, and the possibility of finding a placebo for the disease have compounded the market’s collective anticipation. A scenario like, nevertheless, calls for caution. Today, we will not only introspect but also ascertain whether we need to apply the brakes as well.
First up, however, is a bitter pill —the rally is a bit too one-sided. The large caps seem to have cornered all the attention, leaving limited room for fresh exposure to mid-caps. The former are being chased all the time, thanks to bulge-bracket investors who have displayed little patience for the also-rans. The mid-caps, many of which possess great potential, have not participated in the current upside.
What should investors do in these circumstances? Which strategy would fetch them decent risk-adjusted returns? Is there scope for allocating resources in a different manner?
Vision is all
The right place to begin, of course, is one’s own portfolio. Imagine you are an investor who holds a basket of mid-caps. Chances are you feel a bit flustered at the moment, given the fact that the uptrend has largely bypassed you. If you are convinced that your stocks would indeed live up to their promise, do retain them. Else, a serious review in favour of select large-caps would be necessary.
Initiation of such a process must be backed by a powerful yet individualistic vision — your very own conviction that Stock X would still deliver superlative performance, its market capitalisation be damned. Now, in case such a vision is missing, the alternative needs to be found by way of another stock. Therefore, Stock Y has to be identified, and purchase transactions would have to be executed over a period of time. Whether Stock Y should be large-cap is a decision worth your time.
This takes us back to the original issue — the prevalence of large-caps on marketmen’s radar. If you wish to fall in line, consider this:
- Check out the large-caps in the sectors of your choice. In case you want a diversified mix, you will probably have to sift through a clutch of 50-75 stocks, and finally select a couple of dozen reliable names.
- Selection should be driven by the presence of a number of benevolent factors too. A clutch of favourable ratios — PE, EPS, dividend yield are just three of them — would help.
- Any replacement (switching from mid-cap to large-cap) could be an expensive proposition. Offloading of stocks could well result in capital gains, which are taxable. The short-term variety of such gains attract tax at a fairly steep rate in our country.
- Working out a portfolio on the basis of sheer market capitalisation is never a smart idea. However, market cap is a key determinant. The lower-rung stocks do not enjoy the kind of attention that their large-caps counterparts receive. When big money chases the big guns, the snowballing action can have an extraordinary effect on prices.
Tailwinds
Tailwinds are everything; they come together to fuel stock prices and take them to greater highs. This is reflected adequately in the indices, especially the two that are tracked by all — Nifty and Sensex. At 12780 points, the 50-share Nifty is the most obvious choice for those who want a basket of super large-caps. An investor can approach it in two ways. One, he can do a bit of stock-picking on his own. Here, he need not abide by the weightages assigned to Nifty constituents. The idea is to outperform the index.
Two, he can acquire an index fund based on Nifty. This is done with the purpose of mirroring the returns delivered by the index. There is no question of outperformance. Index funds based on Nifty have a serious advantage: they are an inexpensive way of owning the most eminent stocks. Index funds, especially the exchange traded ones, have emerged globally as a convenient way of holding securities.
Large-caps today
The large-cap story is being loudly chased by the investment fraternity. A number of stocks that figure in this bracket are near their peaks, while others are believed to be getting closer. Whether the saga would continue unabated is not for us to speculate on. However, getting a fair idea of the actual index statistics is recommended.
Once again, I refer to the Nifty. Its three leading contributors are financial services, IT and oil & gas. Together, they account for about 70 per cent of its aggregate weightage.
Pharmaceuticals, the current rage, is a single-digit contributor at 3.75 per cent.
This is a lop-sided concoction. The powerful counter argument is that the Nifty stocks that are not part of the bulge bracket have enough potential to grow in stature. Any added thrust from them would make the index an even more convincing proxy for the entire market. A similar story is being played on the BSE front, thanks to the antics of the BSE Sensex.
The writer is director of Wishlist Capital Advisors