Asset allocation is an essential tool in diversifying investment portfolio

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Domestic and international liquidity factors have been quite favourable and, therefore, volatility is also on lower side.

Outlook for 2018

The Nifty Index has delivered approximately 12% annual return in INR terms over the past five years despite a weak 4% corporate earnings CAGR. Consensus earnings are expected to improve at double digit CAGR over the next two years as corporate earnings return to normal. Domestic and international liquidity factors have been quite favourable and, therefore, volatility is also on lower side.

However, one year forward earnings, Broad Index is trading at close to 21x which is on higher side when compared to long term averages. Going forward, there would be moderate returns expectation, which should be largely led by recovery in earnings.

Insight on Indian Economy

Gross fixed capital formation (GFCF) or investments in the economy have shrunk from 34% of GDP in FY12 to 27% now – at 13-year low which is a clear reflection that economic parameters are at a bottom. Corporate profits as a percentage of GDP at 3% is also at a 14-year low.

The property cycle has been weak for the past five years and affordability has improved considerably specially in the affordable housing segment (INR 5m or below). Corporate capex cycle, which has been weaker, will take a while to improve. So timing is uncertain if expecting recovery.

Sectors to bullish or bearish

Some bright spots can be seen in Q2 FY18 results which were generally good and showed a moderate improvement in the underlying trend in a few sectors.
Banks’ slippages saw a decline for most banks, Consumer staple companies’ volumes recovered led by restocking and several saw improvement in EBITDA margins, Telecom companies saw moderation in competitive intensity resulting in strong performance for some companies.

Growth is also visible in global commodity space be it metal or oil & gas and refining. Further H2 FY18, earning support should also come on lower base, as last year earnings were weaker post demonetization. Pockets may also emerge in corporate banking space (where credit cost may be close to peaking out) and sectors, where valuations have corrected based on near term growth concern but longer term outlook remain strong.

Advice for retail investors

Asset allocation is an essential tool in diversifying investment portfolio. It refers to having right mix of investment options aligned to your risk profile, age, time horizon and financial goals. Making regular checks ensures that your risk tolerance is maintained and your investment portfolio meets your investment goal. Diversification of your investment portfolio based on an asset allocation strategy, that is right for you, is the key to investing.

The investors should start the journey and invest at regular interval using tools like Mutual Fund SIP’s. Any correction in markets may be used to increase allocation to the equity.

(The writer is Head-Research and Fund Manager, UTI AMC)