Stock markets globally and in India have been supported by liquidity unleashed by the global central banks. As a result, Indian and global equity markets are steadily marching to new highs and are trading at steep valuations.

Liquidity support coupled with near-zero cost of capital in most parts of the world have played a big role in ensuring that equity markets remain resilient.

The Indian business cycle is attractive given that corporate houses have deleveraged, credit growth is very low, the capex cycle is yet to revive and the profit-to-GDP ratio too is low.

Economic recovery seems to have been delayed because of the second wave of the pandemic, but we believe the recovery is well on track given the fairly resilient domestic economic indicators, favourable macro environment, government policies and supportive RBI measures.

On the other hand, US corporate profit-to-GDP ratio is high and the country has pursued extremely aggressive fiscal and monetary policies. So, the risk of a global business cycle contraction exists but the Indian business cycle is in its initial stages.

After the 2018 market fall, the market rally was concentrated and led by growth stocks. However, after October 2020, we have seen a broader based rally and going forward we expect this rally to continue as the economy further opens up.

From a macro perspective, inflation should not be seen as a major risk. We believe going forward inflation is likely to be stable. Historically, it has been observed that when inflation is at manageable levels, it gives a boost to economic activity. During such times, businesses are able to sell goods at a faster pace and the recent uptick in real estate sales is a case in point.

In terms of sectors, we are optimistic about select private sector banks, power, telecom, metals and software. The IT sector has been one of the biggest beneficiaries of the work from home culture during the pandemic. As a result, the sector has gone through substantial valuation re-rating.

Commodity companies are another pocket we are positive about as this space has witnessed significant under-investment over the past several years. Supply may not be able to catch up with demand, thus driving metal prices higher. This thesis on the metal played out very well in FY2020-21 and this trend is likely to continue in the near term.

More caution than last year

Investing at an all-time high requires much more caution than what was required while investing in March 2020, a time when the market was steadily correcting.

When considering the previous all-time highs of the market seen during 1999, 2007 and 2017, the common feature is that investors fail to practice asset allocation, which means investing across debt, equity and other asset classes.

An investor today can opt for balanced advantage or dynamically managed asset allocation schemes to achieve this objective.

In such a fund, the corpus is deployed across equity and debt asset classes based on their relative attractiveness. While equity provides the growth element, the debt allocation cushions the impact of high volatility in equities. Given the active management of asset allocation, such a scheme can be a part of one’s core portfolio.

The other mistake that investors make is to go for stocks where sizeable gains are being made. In 1999, the investor favourite theme was TMT —technology, media and telecom stocks, while in 2007, it was infrastructure and in 2017, it was smallcap. This challenge can be addressed by investing across a diverse set of stocks through mutual fund categories such as the flexicap.

Here, the fund manager has the flexibility to invest across large, mid and small cap names. This approach will help mitigate the risks associated with investing in a narrow set of stocks. For those opting to invest in an equity oriented scheme can consider investing from a long-term perspective through the SIP route.

Risk factors to watch out for

The US Fed rate hike is likely to be the biggest risks for the domestic market over the next two years.

While Fed chairman Jerome Powell lowered rate hike concerns, he acknowledged that the Fed was considering tapering its bond-buying $120 billion a month programme, which includes $80 billion in treasury securities and $40 billion in mortgage-backed debt.

This development has the potential to derail the global and US markets. As we live in a world which is much more intertwined than earlier, a global development of this magnitude is sure to impact domestic market as well. Needless to say, this could keep volatility at elevated levels as and when it plays out. Another source of uncertainty for the market is the evolving pandemic situation in the light of new Delta variant.

The writer is ED and CIO, ICICI Prudential AMC