With Nifty at 10,000 - how to approach equities in 2018 - Motilal Oswal

With Nifty at 10,000 - how to approach equities in 2018

Perhaps, the biggest event for the markets in 2017 was the Gujarat elections. With the elections over and the voters standing behind a status quo, the big question is what next for the Nifty. The year 2017 is almost gone and it is time to prepare a strategy for year 2018. The difference is that you will be entering the New Year at an all-time high. That makes your task all the more harder. Does the Nifty have legs to go further up from here? Are there are valuations concerns in the stock market? Should your approach be bottom-up or top-down? These are some of the question you will seek to address as you embark on a New Year..

10 ways to approach the stock market with Nifty at 10,000

Don't be obsessed with the level of the Nifty. At the end of the day it really does not matter if the Nifty is at 10,000 or 9,000. Anyways, it is not practically possible for you to time your purchases. Buying at the bottom and selling at the top is something that only exists on paper. Your focus should be more on identifying quality stocks but more importantly it is important to invest. If the Nifty goes up to 12,000 but you do not invest at all, the Nifty level is purely of academic interest. Don't obsess yourself with Nifty levels.

Adopt a bottom-up approach. The beauty of a bottom-up approach is that it does not focus too much on macros and sectoral factors. There have always been macro challenges and there always will be sectoral challenges. A good company is one that can overcome these challenges and perform. Take the case of Motherson Sumi. It has been through a variety cycles in the auto ancillary markets in the last 15 years but continues to consistently outperform the sector. That is why bottom-up approach matters.

Focus on the global macros, they could be the key. The one thing you need to focus on in the coming year is the global macros. Fed funds, global tightening, Chinese demand and BREXIT impact could all be a lot more pronounced. These global macros may matter a lot more than domestic macros in 2018.

Focus on growth more than valuations. Logically, why should you obsess with P/E ratios and P/BV ratios when the Nifty is at 10,000? Your focus should be on growth. Don’t worry if the P/E is 40 times earnings. If the company's profits and sales are growing at 30% annually then such rich valuations are still justified. At market peaks, it is only growth that will give you alpha. Value plays will be few and far between.

Focus on mid-caps as potent themes. Like in the last 3 years mid-caps will continue to outperform in 2018. Firstly, they have focused business models, which can best perform at peak valuations. Secondly, mid-caps tend to be less leveraged compared to the larger stocks in the infrastructure, power and telecom space. Lower debt means higher ROE and that is what determines stock value, after all.

Adopt a phased approach to investing. We know phased approach by various names. In the world of mutual funds you call it systematic investing. The same approach can be applied in case of equities too. Especially when the Nifty is above the 10,000 mark, it makes all the more sense for you to adopt a phased approach. By phasing your investments you get the benefit of rupee cost averaging and also reduce your average cost of acquisition.

Broaden the asset classes you invest in. Don't get obsessed by equities alone. Include debt if you believe that rates could go down. Add gold if you see geopolitical uncertainty catching up. Also look at novel products like structures and REITS, although you must strict portfolio limits to your exposure to such products. At the end of the day, you can use highs to add variety to your portfolio. That could be the big theme in 2018.

Be prepared for volatility and hedge your portfolio. When the Nifty is above 10,000 you must be prepared for bouts of volatility. We have seen the VIX oscillate in the last few months and we will continue to see this trend in the coming year too. The best way is to use a bit of options and futures to hedge your risk. Options give you the capacity to cover your downside risk with limited risk. Don't get into speculating on futures and options but use them to play the market both ways.

The big story will still be domestic themes. The big themes in 2018 will be ideas like rural infrastructure, consumption, agri-themes etc. We need to remember that it is a pre-election year and themes will emerge accordingly. If anxious investors are looking at a boost from traditional global players like IT and pharma, they could still be disappointed. The underlying story will still be domestic only.

You can still make money over the long term. Finally, that is the good news. You do not have to believe that at 10,000 Nifty there will not be multi-baggers. In fact, there will still be plenty of multi-baggers, perhaps more so in the mid-cap space. Don't let the Nifty level distract you from wealth creation.

Year 2018 will be an interesting year but it will also be a year of opportunities. There will be a plethora of wealth creating opportunities. You just need to be discerning enough!

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