Sensex & Nifty Targets

I have received a long & comprehensive query in the ‘Comments’ section of my previous post on the prevailing status of equity markets by one Mr Dark Knight Abhay. Even Mohit has posed somewhat same query related to targets for Sensex and Nifty and their next course of action.

Dark Knight Abhay's query typically depicts plight of many gullible investors who initially go by words of TV Analysts. Most of the times, these analysts may be speaking from short-term perspective which is often implied wrongly as long-term call by many investors. So, in short-term, what may be a bearish call by these analysts is construed as bearish long-term outlook by investors due to lack of clarity of nature of their call. This induces the investors to stay away from the markets in the times of extreme panic and mahyem. Though, there are other analysts who give calls clearly from the long-term horizon. Below is the query posted by the reader (Abhay) in the ‘Comments’ section of my previous blog posting:

Hi Viral,

The markets are making me mad, the Sensex today crossed 10,000 level, all the resistance made by the TV analysts are broken down. When the markets were on 8000- I missed to buy as this people said that it will reach 7000 - 6000..... Now their target is 11,000...

What can u say about the current rally...? I don’t think it will last long as it's doing what it did last time when it reached 7,700 in Oct. and bouncing back to 10,000 and again crashing...

I have sold some of my stocks… And I wanted to know what’s u r target for Sensex for the next few days and after a month. Waiting for your reply…

Thanx

Recession feeds into severe Recession:

Slowdown leads to further severe slowdown in an economy. Slowdown phenomenon feeds on pessimistic news of slack in demand & eventual cut in production of output. Slowdown is often coupled with falling prices on the back of fall in aggregate demand. Consumers tend to delay their purchasing decisions to a later period on anticipation of further fall in prices in times to come. This leads to postponing of lift in demand led by pessimistic approach of consumers. The cycle feeds on itself leading to a prolonged slowdown or recession.

Gradual Reversing of the Cycle:

But, sooner or later, this cycle has to break its path of movement and the slowdown reaches the trough of pessimistic approach. The slowdown reaches such proportion that price factor of goods and services are rationalized to very reasonable levels. This is further aided by the cause that demand from the consumers which was constantly delayed on the back of negative outlook has to materialize sometime or other and give way for shopping call. This slowly leads in to emergence of demand at lower prices and consequently gradual pick up in aggregate demand over a period of time. Steadily this leads the way out of the economic rot.

However, this is only one way of uplifting economy and the economy does not necessarily operate on such simple & summarized explanation of cycle of economy. The economy needs lift & stimulus from various sources fiscal, monetary, government spending, trade stimulus, policy reforms, encouraging for disbursement of savings into investments and private sector spending among various aspects that contribute towards a complete recovery of an economy from a long-drawn recession.

Analysts feeding on Pessimistic Sentiment:

Similarly, pessimism feeds into further pessimism. When there prevalence of the pessimistic environment, all possible news from different quarters point towards negative sentiment. This inflates a balloon into a football of doom situation. When such is the extent negative sentiment, even so called ‘Analysts’ prefer to go in the line with the prevailing trend. When markets are moving in almost a linear fashion with a downside bias, Analysts prefer to ride the negative trend further fuelling the wave of pessimism.

However, this story is not comprehensive. There are also other types of Analysts who have tendency to walk in opposite direction of the trend and go out of way to give investors the calls which are ‘Contra’ in nature. They present investors with the other side of the story and signify that markets can never be unidirectional on permanent basis. The trend ought to change sooner or later.

Someone has rightly said, ‘Listen to all possible analysts but take your own call based on informed decision.’ Keep your mind open to let in views of all possible nature and sources – positive and negative. But while making your decision to invest your hard earned money, take as much effort to understand about it as you shall be taking while buying any other expensive commodity from the market.

Technical Views on Nifty:

Nifty is currently trading with the broad range of 2550-3150 since many months. Nifty 2550 levels are equivalent to Sensex 8500 levels & 3150 corresponds to Sensex 10500 levels. Stiff Nifty resistance is long standing at 3150 level & strong support lowly sits at 2550 since quite some time now.

Nifty levels of 3150 has been tried and tested for as many as 3-4 times in past 6 months but all attempts in vain against this strong resistance level. Nifty 2550 is the level at which markets had formed a likely bottom on closing basis in the month of October 2008. Within the current broad range of Nifty levels 2550-3150, it has worked out its way for narrow ranges like 2550-2850 and 2850-3150 lasting for several weeks altogether.

On the other hand, on the break-out from Nifty 3200 levels, markets are poised for yet another big relief rally which could extend until Nifty levels 3550-3850 on the upside.A weekly Close above Nifty 3200 is crucial for break-out from the prevailing broad range of 2550-3150.

My Targets for Sensex and Nifty on the Downside:

Below Nifty 2550 levels, Nifty is likely to find some intermediate support around 2250 levels which were tested on intra-day basis during the month of October 2008. Below 2250 the next support is reached around 1800 which shall roughly correspond to around Sensex levels 6000-6500. This is the worst case scenario in my eye for this bear market, which my or may not occur in the upcoming future. As of now, Nifty 2550 levels are implied as current market bottom which are tested approximately twice till now.

Usually, in bear markets the bottoms are tested and re-tested for multiple numbers of times to determine the strength of the ultimate market bottom. So, it can not be absolutely ruled out that markets may again come lower and re-test the ‘so-called’ bottom level of 2550 again to check the knot of its absolute effectiveness.

My Expectation: Nifty may bottom out in the range of 2000-2500 (Sensex 7000-8000) what with some bit of positive news have started trickling in by the way of robust numbers from capital goods & steel sector. These two sector forms a core for determining the pace and development of infrastructural growth.

Nifty Upside Targets & Bear Market Rally:

Interestingly, sometimes in bear markets, the rallies are sharp enough to give gullible investors the wrong signal that a new dawn of the bull phase has commenced. Surprisingly, these ‘Bear market Rallies’ last long enough to woe even most seasoned of the investors in be sucked in by such rallies which almost resemble bull market exuberance.

Most recently we have witnessed markets soaring at a dizzy speed on the back of positive global cues and sentiment. Sensex was around 8200 on 12th March 2009 and it has appreciated steely to 10,000 levels in a matter of 15 days period as on 27th March 2009. Nifty has had a dream journey of 600 points in such short span of time. If indeed this is touted to be one of those classic 'Bear Market Rally', this dream run could even extend to another Nifty 800 point rise from current levels, giving sense of emergence of new but 'false' bull run. This spells target of around Nifty 3850 levels if the 'Bear market Rally' fructifies.

Importance of Nifty level 3200:

Nifty levels 3150-3200 have been tried & tested several times in last half year. This simply means markets have more often than not got over bought around this zone. More so, there is a great deal of Supply around this arena which has till now out done any sort of demand factor. If the current rally which has started from around 2600 levels needs to fructify & balloon into a roaring 'Bear market Rally', the break-out from this stiff resistance levels of Nifty 3200 is a must for any sort of survival for a sustenance of a 'follow-up' rally from here on.

Justification of Bear market Rally:

This next likely upside momentum from 3200-3850 could be on the back of sustained action from efforts by various Central Governments all over the world. Several integrated steps of monetary and fiscal measures adopted by the Central Banks the world over. Add to that a series of stimulus packages & government spending by big-league developed companies could temporarily act as a positive trigger on the back of 'false' signs of revival in various macro economic factors.

This so-called revival may prop up Rupee-dollar equation & foreign inflows into the country further giving an impression of bulging forex kitty. Gradually, the economy would record positive news flow in rate sensitive sectors like Automobiles & Real-estate. But, this all could prove false once the bear market rally is up for wrapping and comes in sync with market weakness and negative global cues.

Fate of Large-caps that witnessed sharp Rally:

More than half of the current market jump from Sensex 8200 to 10,000 levels is on the back of few heavy weight Large-cap stocks like RIL, BHEL, ICICI, Infosys and HDFC Ltd. to name a few. Reliance Industries was quoting at Rs.1153 at the closing of March 11 as against Rs.1548 as on March 27, a steep upside of 35% from the then closing levels. ICICI which was floating at lower levels of Rs.262 at the close of 11th March saw a steep upside to close at Rs.385, an appreciation of 45% from its lows. This was followed by HDFC Ltd. which was around Rs.1255 on March 11 and a sharp rally to Rs.1590 to close on March 27.

On the other hand, Cement major Grasim Industries which had recorded a 52 week lows of Rs.831 during October 2008 has almost doubled up to close at Rs.1606 as on March 27, 2009 on the back of strong fundamentals & diversified presence in the business of Cement and Viscose fibre.

Can these rallies in Large-caps Sustain?

Most of the recent market rally was largely fuelled by large-caps & lack of retail participation saw a low zeal of interest in Mid-cap participation in the rally. One striking fact that comes into my mind is that on previous occasion when the Nifty peaked out around 3150, Reliance and Bhel has established the levels prevailing currently. Which implies, this time around these stocks have out-performed markets and have attained those levels on good 50 points in advance on Nifty & 500 points on Sensex.

From here, even if markets were to rally forward by witnessing a break-out into a new range above 3200, it is highly unlikely that the current constituents of the index which have contributed majorly in the recent up move would participate aggressively as most of these heavy weights are somewhat in short-term over-bought zone. This would indicate that index may have to spurt on the support of remaining major constituents like ONGC, Bharti Airtel, Reliance Communications, ITC and HDFC Bank among others.

Non-active participation of heavy weights like Reliance, HDFC Ltd, Bhel and ICICI would mean that there shall not be a sustained & a consistent up move from here, inflicting a case of highly volatile & fluctuating game for the bull and the bear cartels of the market. Every rally will be consciously met by retail investors exiting at higher levels.

My Sensex & Nifty Targets based on current News Flow:

It is not possible to consistently forecast the market trend & movement as it depends on various factors ranging from investor sentiment, forecasting future earnings, facts and rumors, macro environmental forces, commodity cycles, monetary policies and global linkages among various other factors. We can only conduct our own research and form an opinion based on prevailing facts & guesstimates of corporate earning prospects. As the economic situations changes consequently effecting earnings of the companies, the estimates may have to be adjusted factoring in all possible good and bad news.

From the above, for the time being, I can conclude that Sensex and Nifty may find its bottom around 7000-8000 and 2000-2500 points respectively. Though, the worst case scenario of Sensex 6000-7000 can't be absolutely ruled out in case global markets, especially, the developed markets go for a complete tail-spin and deep long-drawn recession. In any case, a much deeper correction is not feasible for a relatively faster growing and emerging economy like India.

On the other hand, for any sort of sustained 'Bear Market Rally', I see it difficult for Nifty to surpass stiff resistances of 3850-4250 levels.

Strategies for Traders:

For traders active in engaging in various kinds of trade, can have a keen eye on weekly closing levels of Nifty 3150 levels which has acted as a strong resistance on the upside in the last 6-8 months. The confirmation of the break-out can be expected with a closing above 3200 with a Stop Loss at 3020 and initial target of 3550.

Contra Traders: Traders willing to go an unusual bet can approach the markets by shorting around 3100-3200 zone with a Stop Loss of 3250 with an initial target of 2900 , the call based on Technicals of the Nifty movement. This call is 'Contra' in nature, as it is not usually advisable for traders to act in direction contrary to market trend which is 'up' as of now unless Nifty sustains above 2850.

Traders at Side lines: Traders with no open positions should wait out for the time being. They should either wait for a substantial dip and a consequent opportunity to go long around Nifty 2900 levels. Currently, markets are quite over-bought in very near term period. Quite possibly, markets may show a very limited up move as possible from here, & get back to test lower levels of around 2900-3020 in very near term as a 'Breather' pull back.

Last Stage of Bear Markets:

The current rot in global markets finds its roots in the crumbling fundamentals of housing markets with its contagion effects on the Financial sector. Such scenarios are often deep and painful to recover from, especially, if it stands out to be a long-drawn process. Housing & Financials for a major part of any economy as they are indirectly related with many related and ancillary industries that thrive on these benchmark sectors.

With as much as pain witnessed in last more than 1 year, economies the world over would find it difficult and an elongated process to revive themselves from the current rot with wide spread impact which have gradually affected the fundamentals of all possible industries dependent, directly or indirectly, on housing and/or finance sectors.

Slow pick-up of Revival:

Stocks markets the world over has till now witnessed almost a linear fall since more than last 1 year, which signals that the bottoming out process has just yet started. And, bear market bottoms tend to be long 'U' shaped like curves rather than 'V' shaped recoveries that we usually witnessed during the small bull phase corrections.

Bear markets are often characterized by depressed and mouth watering valuations for long time before they see any sort of pick-up in demand from genuine long-term investors. Usually, buyers lack interest in buying during such pessimistic scenarios where the returns from equity have turned negative, leave alone the positive prospects & depressed valuations of the Corporate world. This lack of interest in buying equity as an asset class & a general shift of investors towards debt instruments providing rationalized returns calls for a long-drawn revival over a period of time as sentiment rationalizes from being overly-pessimistic.

Note to Mr Dark Abhay Knight:

"The markets are making me mad, the sensex today crossed 10000 level, all the resistance made by the TV analyst are broken down. when the mkts were on 8000 i missed to buy as this idiots said that it will reach 7000 - 6000."...

When you say the above mentioned lines, it is clearly visible that you were attempting to TIME market entry based on Analyst views. To me, trying to time the market is the worst possible act that investors can do. One can not be successful all the time while looking to time his entry/exit. Not even the best of the analysts can predict such market movements on a consistent basis.

Please don't take it as anything personal against you. In fact, same is the plight of most of the other investors who attempt to TIME market entry/exit.

You should look forward to read my 1st ever article on this blog based on 'Strategy for Investment'. It demonstrates as to why you should not look forward to have pre-set targets either while plunging into markets and even while exiting the markets. There are various benefits linked to using this strategies.

A Request to Readers:
Readers are requested to post their view/query/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive Comments section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Diversification of Equity Portfolio

They say that sometimes in stock market experience comes in more handful than mere knowledge and/or information. Similarly, an investor can get to learn & obtain more and more know-how about investing as he experiences a patch of lean period of action like current bear phase. And nothing better than the ongoing deep recessionary bear market across the globe. It teaches various lessons which may range from patience, perseverance, art of staggering investments, discipline in decision making and rationalization of expectations among various others.

Though, it is understood that, investors in stock markets have short and weak memory. Most of the times, they do learn quickly from their past mistakes. But, as soon as times of recovery re-emerge on the horizon along with the waves of over-exuberance, they tend to forget about the past experience and fail to implement the lessons of the bad times thus depicting lack of discipline & perseverance.


Diversifying Fruitfully:

Every kind of asset class is fraught with uncertainty upto a certain extent. No investment is a sure shot guarantee of fixed returns. This aspect of uncertainty in offering returns makes the world of investment diverse and broad in nature depending upon its return and risk profile. This very quality of uniqueness in providing diverse returns is useful to determine & examine various options from the number of different asset class based on one’s investment and risk profile.

Diversification - to explain it in simple language, suppose there are 2 baskets full of fruits. One of them consists of only five Apples. The other one is filled with Mango, Apple, Grapes, Orange and Banana. Thus, both the baskets are filled with 5 units of fruits each – one with only Apples & other with mixed fruits. Which basket would you choose from? The one filled with only Apples or the one with the mixed basket of fruits?

The answer would be simple- any rational person would choose a mixed fruit basket simply because it contains of various different fruits. The person would get bored and would not like to eat 5 Apples at a time from the first basket. It may also be possible that the person may not have a liking towards the taste of Apple. In that case, he will have to remain hungry if he is awarded first basket filled with only Apples.

But, if the person is given the second basket, he may get to cherish different fruits with different taste and flavours. Even if the person does not have a liking towards a particular 1 or 2 specific fruits from the mixed fruit basket, he has the option to fill his stomach with remaining different varieties of fruits.


Diversification of Equity Portfolio:

Same is the correlation between the above example of mixed fruit basket and diversification of equity portfolio. Just as the person opting for the second basket of mixed fruit, who did not like 1 or 2 fruits even from the mixed fruit basket, could contain his hunger by consuming remaining varieties of fruits – even an investor could shield his portfolio performance and movement from the dominance of a particular stock(s)’ performance.


De-risking of Portfolio:

In equity markets, diversification is needed to de-risk the portfolio from the risks and uncertainty revolving around any specific company’s stock. Also, an under-diversified portfolio is vulnerable to movement & fluctuation of the limited number of constituent stocks in one’s kitty. The returns of an under-diversified portfolio could be affected negatively, if one of the major constituent in the portfolio witnesses any sort of setback or slowdown or even frauds as experienced recently by shareholders of Satyam Computers. This shows that even financially sound companies with good past management track record can also go down under or get stuck in trouble by any kind of fraud or mismanagement issues.

Going much deeper into the topic of diversification, one can also create and tweak diversification strategy depending upon one’s goals, objectives & risk profile. Diversification of an equity portfolio could be of two types:


1) Sector Allocation
2) Staggering by Time.


Sector Allocation:

This form of diversification relates to buying stake of companies operating in various different sectors and industries. This form of diversification shields one’s portfolio from the exposure and risks related to performance and prospects of a particular sector of the industry. Many-a-times, particular business operations are exposed to performance according to the seasonal nature of markets. During such times, the performance of the company may get affected during the season period of lean operations or demand for their goods or services.


Why is Sector Diversification needed?

Sector wise Diversification is needed in long-term investment as the investor is willing to wait & hold the portfolio for a longer-duration of time or until his pre-set targets are achieved. This long-term investment can span across few years or even more. During such times, in this constantly changing environment, various sector of the economy come into bullish TREND & diminish from the buzz due to various factors like seasonality, slowdown, etc. The trend keeps changing among various sectors depending upon various internal and/or external conditions related to the economy in general.

Like, for example, at one point of time, IT sector was doing very well. But with recent recessionary environment in US, it is more likely that even the IT sector may witness a slowing demand for their services as their clients tighten their fist to curtail & control expenses. Thus the IT sector was prone to external environmental conditions prevailing in overseas markets.


Examples of Sector Diversification:

1) Highlights of Defensive stocks: Let us take another example, currently in the ongoing bear phase, FMCG sector has shown better resilience to downturn due to their nature of dealing in the space of inevitable fast-moving consumer goods which may be needed in daily sustenance of life. At the most, consumers may opt to stop using expensive soaps and switch to cheaper soaps, but they won’t absolutely stop using them in their routine life. Same logic goes for Pharmaceutical sector, where people won’t stop consuming medicines even in a bearish and slowing market conditions.

But, in the last bull phase, the above mentioned so-called ‘Defensive stocks’ had under-performed markets based on their nature of slow & steady growth based on routine consumer demand. Markets do not correlate such defensive stocks with bright prospects as in ‘Growth’ stocks. This leads to under-performance of stocks from defensive sectors during bull phases & out-performance during periods of pessimism when defensive sectors are awarded for their dealing in the space of steady business operations.

2) Highlights of Growth stocks: On the other hand, during the last bull phase, we witnessed sharp rallies in stocks related with Commodity businesses, like for example Metals, Crude, etc. on the back of thinking of investors and analysts that these natural resources are up for extinction in the global markets and thus ripe for demand-supply mismatch.

Thus, for an investor with long-term horizon, needs to have stocks from various different sectors so as to ably float through all different business cycles & phases with some degree of cushion strength. If the investor has some stocks from FMCG sector, it would help him to ride through the volatility of bear phase.

Based on above discussion, it could be implied that every portfolio should have around 10-20% investment in DEFENSIVE sector stocks to over-come the over-aggressiveness of remaining sectors. This would provide cushion of safety when the tide turns in opposite direction, as we witnessing right now – in the current bear phase.


Staggering by Time:

Staggering by time is nothing but spreading one’s investments over a period of time in a strategic manner. This strategy helps in curtailing concentration of investments in a short span of time & thus proves a shield by not endangering the investors to the vagaries of market movement in a specific short-term period.

Like for example, many new investors plunged into stocks markets when the indices started coming-off from its peaks recorded a little more than a year ago. When indices started to slump from Sensex 21000 levels and reached 16000 levels, many investors felt it is an opportunity to invest money at lower levels. A large number of people would have invested at such lower levels as well. And it was quite understandable, at that time- based on fundamentals then, that investors sitting on cash would have invested then.

But, what would have happened such investors would have invested all their life’s savings specifically at 16000 levels?

As we know markets plunged further to establish even lower levels to date, these investors would have run out of money had they opted to invest most of their idle funds at higher levels of Sensex16000. Those who would have used the strategy of staggering the investment of their funds at different point of time intervals, would have benefited in spreading their investments in a thin manner at even lower levels, say, at an interval of every 3 months.

You can read more on my detailed views on the approach of Staggering by Time in my first ever posting in this blog with the title ‘Strategy for Investment’.


Sector Allocation Guide:
Given below are various different Sectors in which investors can diversify their funds to de-risk through Sector Allocation strategy:

Core Sector:

Capital Goods & Engineering: 15-20%
Power & Energy Sector: 14-18%
Banking & NBFC: 12-16%
Oil & Gas Sector: 12-14%
Telecom Sector: 8-12%

Non-Core Sectors:

Real Estate & Construction: 8-10%
Information Technology: 7-10%
Pharmaceutical & Healthcare: 5-8%
Automobile Sector: 6-8%
Media & Entertainment: 6-8%
FMCG Sector: 4-6%
Metals: 6-8%

The above is one such presentation of diversifying an equity portfolio based on strategy of Sector allocation. The above does not mean to imply that one must be invested in the entire list of above sector. One can opt for any 6-8 sectors from the above list.

However, it would be preferable if one has some sort of mandatory investments in the all the first 5 sectors of Capital Goods, Banking, Telecom, Power & Oil and Gas. It’s like a Core Sector group. From the remaining list of Non-core sector, one can opt for any 3-4 sectors depending upon one’s likes & dislikes.


Diversification by Market Capitalization:

Another way of looking at Equity portfolio diversification is determining on the basis of a stock’s market capitalization levels– Large cap, Mid-cap and Small cap.

Large cap Stock: Market cap of above Rs.5000 cr.
Mid cap Stock: Market cap in the range of Rs.500 cr to 5000 cr.
Small cap Stock: Market cap of below Rs.500 cr.

Though, this does not exactly specify the rule for determining the market cap of all companies. In bull phase, most of the mid-cap would have been valued at market cap of over Rs.5000 crore. But, in the current bear scenario, not many mid-caps are able to survive above Rs.5000 crore. So, the above formula of determining stocks based on market capital is a highly ‘Relative’ guide. Though, this can be taken as a rough estimate in laying companies unique from each other based on market capitalization of these companies.

Usually, large caps are associated with safety & steadiness during such pessimistic times. On the other hand, mid & small caps are regarded as highly risky and fluctuating during such slowing times.

I would suggest investment in stocks based on market cap for various investors with varied RISK profile as follows:

Low risk Profile:
75-85% in Large caps.
15-25% in Mid caps
Nil in Small caps.

Medium Risk Profile:
65-75% in Large caps
25-35% in Mid caps
0-5% in Small caps

High Risk Profile:
45-60% in Large caps
40-55% in Mid caps
5-15% in Small caps


Correlating 'Sector Diversification' Strategy with my 'Favourite Stocks for Long-term Investment':

In my previous post, i had listed the list of my favourite stocks for long-term investment plans. Now, over here, i will correlate that portfolio with the above discussed strategy on 'Sector Allocation' for Diversifying portfolio:


(A) Core Sector:

Capital Goods & Engineering: 15-20%
Larsen & Toubro: 12%
Bhel: 4%
Thermax: 3%

Power & Energy Sector: 14-16%
NTPC: 5%
Power Grid: 5%
R.power: 3%
Suzlon: 3%

Banking & NBFC: 12-16%
State Bank of India: 6%
ICICI: 3%
R.Capital: 3%

Telecom Sector: 8-12%
R.Comm: 5%
OnMobile: 3%

Oil & Gas Sector: 12-14%
Reliance Industries: 13%

(B) Non-Core Sectors:

Real Estate & Construction: 7-10%
DLF: 4%
HCC: 3%

Information Technology: 7-10%
TCS: 4%
Financial Tech: 3%

Pharmaceutical & Healthcare: 5-8%
Ranbaxy: 3%
Biocon: 3%

FMCG Sector: 4-6%
ITC: 5%

Metals: 6-8%
Sterlite Ind: 4%
Sesa Goa: 3%

Total = 100%

Portfolio Features of the above presentation:

In the above Analysis of Portfolio coupled with Sector Allocation, I have tried to encompass sector diversification at its best to my knowledge. The above portfolio constitutes of Large Caps to the extent of 72% of the portfolio & 28% reliance on Mid-cap stocks, thus favouring Low risk to medium risk investors both. Readers can carry out minor adjustments to the portfolio to suit exactly to their risk profile by few nothces up or down.

11% of the above portfolio is formed of Defensive sector stocks like FMCG and Pharma that shall be useful to shield the investor from the sharp fluctuations and vagaries of the market. 'Core' sectors like Capital Goods & Engineering, Power & Energy, Banking & finance, Telecom and Oil & Gas Sectors constitute 68% of the over portfolio leaving the remaining space for the non-core portfolio sectors.

Portfolio Summary on Sector Allocation:

1) The portfolio constitutes of balanced number of 22 stocks.
2) Large caps: 72%, Mid caps: 28%
3) Core Sectors: 68%, Non-core Sector: 32%
4) Defensive Sector: 11%
5) Reliance + L&T = 25% of portfolio
6) My Core Portfolio Stocks = 50% of portfolio
(Reliance, L&T, SBI, NTPC, PGCIL, RComm, Bhel)

A Request to Readers:

Readers are requested to share their experience with this posting which has integrated stocks discussed in previous topic along with strategies needed for its better implementation to arrive at a balanced portfolio for long-term investment Readers can share their views in the below given 'Comments' Section.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

My Favourite Picks for Long-term Portfolio

The Indian equity markets have corrected by a whooping 60% from its peaks recorded around January 2008. The above mentioned slump of more than half of the all-time highs is, specifically, in terms of correction in the indices – Nifty and Sensex. Whereas the constituent stocks of the above indices have declined even sharper, inflicting deeper pain on the back of large losses booked by investors. The story is even worse for those investors who kept holding their portfolio with the hope of a ‘turn around’ recovery in the economy & eventually an upswing in the equity markets which led to further mark-to-market losses on their cost of acquisitions of the constituent stocks in their portfolio.


Working of Bear Markets:

As we get deeper into bear markets, the equity investors are increasingly losing faith & sheen in the stock markets. The braoder market is either poised for a long-drawn range bound movement or resume its journey towards attaining its illusive bottom levels. During such bear markets, investors tend to lose interest in equity markets & stay away as a natural instinct on constantly witnessing markets making newer lows. Even investors holding substantial cash & sitting on the side lines, tend to delay their decision of investing in markets until there is some semblance of stability or a new wave of up move.

This article is primarily aimed at new investors who wish to start accumulating good stocks, but have little knowledge as to how to get started with it & which stocks to buy due to their scope of limited knowledge & research in equity markets. Though, even other investors can take a clue from the list of stocks mentioned in this posting as to how to divide the portfolio into parts and give varied importance to different parts of the portfolio depending upon their fundamentals.


Value Investing:

However, long-term investors can find good value among strong fundamental stocks during such depressing times. Most of the big wealth is created by making shopping decisions during times of extreme pessimism and cautious outlook.

The valuations are much more subdued and reasonable during such times when supply outstrips demand. During such phase of slowdown, the investment strategy needs to be staggered as the worst is not yet over for the markets. The price may further dip from the cost of acquisition of investors, but in longer-duration the chances of substantial appreciation stands good and strong.


Building-up of Equity Portfolio:

In this posting, I have discussed about Portfolio Building for Long-term Investment in Equity markets. I will speak out my view on my favourite list of stocks that should constitute as a part of one’s long term aspirations from equity portfolio. The list is reflection of my views on stocks to be held for long term. But, the views of investors can differ from this list of stocks depending upon individual risk profile, long term goals, outlook on equity markets, expected return ratio, age-profile of the investor and many other aspects that goes into determining the portfolio features of an investor.

It is also important to understand that a long-term portfolio should be well Diversified in terms of exposure to specific ‘Sector/Industry’ and even in a ‘Stock specific’ way.


Prior Objective Analysis:

Before building or starting up with a new portfolio, the investor should carry out certain analysis of his future needs & expectations in terms of returns from his money intended to be invested for long-term goals. Without the direction to your portfolio goal, it will run into troubles caused by lack of clarity about future goals and expectations. Like, for example, an investor who has no goal for his money invested, may not be able to determine his target to book profits on his portfolio, as may be suited to his future requirement.

Another case in point, supposes an investor is investing for long-term through Mutual funds. If he has no clear priority in his goals, how would he determine whether to invest in the ‘Dividend’ option of the scheme (which pays dividends based on the fund returns) or to subscribe ‘Growth’ option scheme (where the fund culminates all the returns that accrue to the fund & reinvest the money for further growth). Dividend option gives the investor an option to get regular income in the form of dividends announced by the fund on regular basis. On the other hand, if the investor feels he would be in no dire need of funds in between the time intervals, he may as well opt for the ‘Growth’ scheme of the Mutual fund.


Balancing of Equity Portfolio:

(A) Magnetic touch of Speculation: Equity investments is, traditionally, regarded as ‘long only’ portfolio with a primary objective to earn steady income in the form of ‘dividends’ & secondary aim to earn returns on capital from investments. But, with on set of every new bull phase, this feeling of stable & safe returns is vindicated once investors taste the blood of ‘short-term gains’. Investors get attracted by the prospects of quick gains in few months over long-term wealth creation process.

(B) Categorizing Portfolio: Smart investors are aware that such short-term speculative trading is fraught with dangers of market uncertainty & unpredictability. Sharp market fluctuations can as well inflict painful losses to such investors who may have diverted their attention from ‘long-term portfolio building to short-term speculation’ unless market sustains in positive. To counteract this dichotomy risk of sharp portfolio fluctuation, investors shall go for division of portfolio into 3 different categories.

1) Core Long-term Portfolio
2) Tradable Long-term Portfolio
3) Short-term Speculative Portfolio


Core Portfolio: The Core long-term portfolio refers to a specific set of few very good fundamental stocks that needs to be held for long-term without indulging into trading in these stocks irrespective of trading opportunities based on news/technical indicators/actions related to these stocks. Though, that does not mean that investors should stop tracking the prospects of these stocks once they are bought as a part of their ‘Core’ long-term portfolio. Investors should keep tracking even the best of the best company in their portfolio in the light of current market events, prospects & potential.

Short-term Portfolio: Short-term portfolio is, on the other hand, dictated by a number of market forces like news, rumors, technical indicators, triggering of set target and most importantly exiting when Stop loss levels are hit. Stop loss plays a very important part in determining exit on failure of the call to thrive as per expectations on the stock. Risk management strategies need to be adopted in short-term calls in order to ride out the market uncertainty & fluctuations.

In this posting, we will concentrate on discussions about stocks to be constituted as a part of building ‘Core Portfolio’ and ‘Long-term Portfolio’.


(A) Core Portfolio:

Note: Core portfolio is a list of ‘must have’ stocks in any good long-term portfolio. All the above mentioned 7 stocks should form a part of a core portfolio. As to how much should each of the above stocks constitute as a part of the over-all portfolio in Percentage terms would be dealt in next article on Diversification of Portfolio.

1) Reliance Industries: This stock has a long tradition of rewarding its share holders driven by its diversified business operations led by crude Refining & more recently gas discoveries. The stock has an immense unlocking prospects & large potential reserves in initial stage of discoveries.

Accumulation Zone: Rs.900-1220.

2) Larsen & Toubro: It is yet another diversified stock from engineering & capital goods space with its wings spreading in various sectors like shipping, defense, nuclear power, IT, etc. L&T holds a pending order book of over Rs.75,000 crore. It is a leading Engineering & construction (E&C) company in India.

Accumulation Zone: Rs.450-650.

3) Bhel: It is the largest power equipment manufacturer in India with a pending order book position of over Rs.1 lakh crore. This PSU company forms a core part in India’s emergence as a nuclear power & energy. The company has proven capability of executing power projects from concept to commissioning.

Accumulation Zone: Rs.950-1250.

4) NTPC: This company is by far the largest thermal-power generating company with highest share of power being produced in India. This PSU is placed at the core of India’s nuclear ambitions. The stock has been an out-performer versus the benchmark indices on the back of strong prospects of the power sector and fundamentals of this power company.

Accumulation Zone: Rs.115-145.

5) State Bank of India: This Public sector bank is the one of the largest financial institution in India which holds a record number of branch network spread across India – including urban & rural areas. This large-cap bank is leading the race in providing cheaper & subsidized loans to spur the economy.

Accumulation Zone: Rs.750-950.

6) Power Grid: This PSU Company is a clear case of monopoly in the transmission sector with one of the largest grid network in India. The company has a market share of around 40-50% in the Transmission sector. The company also provides transmission-related consultancy services.

Accumulation Zone: 55-70.

(7) Reliance Comm: This telecom company has presence in both GPRS and CDMA networks. The company has more recently spread its wings within the GPRS network on acquiring licenses for pan India network. The stock has recently witnessed a sharp correction.

Accumulation Zone: Rs.135-185.


(B) Non-Core Large Cap Portfolio:

(Figures within brackets represent the levels of ‘Accumulation Zone’)

1) ONGC (Rs.550-650)
2) TCS (Rs.400-550)
3) HDFC Ltd. (Rs.900-1200)
4) ICICI Bank (Rs.250-350)
5) ACC (Rs.450-550)
6) Grasim (Rs.800-1200)
7) ITC: (Rs.135-155)
8) Cipla (Rs.145-175)
9) M&M (Rs.250-350)
10) Sterlite Ind. (Rs.180-240)
11) DLF (Rs.125-175)

Note: From the above 11 Large Cap stocks, investors should not for all the stocks in the list. They can choose 6-7 stocks depending upon size of an investor’s portfolio, Sector prospects from time to time & the portfolio features & expectations of investor.


(C) Core Mid-Cap Portfolio:

1) R.Capital (Rs.270-370)
2) Suzlon (Rs.30-55)
3) R.Power (Rs.80-115)
4) Sesa Goa (Rs.60-85)
5) Thermax (Rs.155-220)
6) Bharat Electronics (Rs.500-650)
7) Pantaloon Retail (Rs.100-135)
8) IVRCL (Rs.80-125)
9) A.B.Nuvo (Rs.300-450)
10) IDFC (Rs.45-60)
11) GSPL (Rs.25-35)

Note: From the above list of 11 stocks of Core Mid-cap portfolio, Investors should select and buy at least 6-7 stocks from long-term horizon. All the above stocks are fundamental picks from the mid-cap space.


(D) Non Core Mid-Cap Portfolio:

1) LIC Hsg Fin (Rs.170-215)
2) Gitanjali Gems (Rs.35-55)
3) Oracle Financials (Rs.450-600)
4) Bank of Baroda (Rs.170-200)
5) Praj Industries (Rs.45-65)
6) PVR (Rs.70-110)
7) Videocon Ind. (Rs.80-130)
8) Welspun Gujrat (Rs.60-90)
9) Educomp (Rs.800-1200)
10) Jain Irrigation (Rs.280-350)
11) Punj Llyod (Rs.70-120)
12) Everest Kanto (Rs.90-120)
13) Adlabs (Rs.150-200)
14) Indian Hotels (Rs.30-50)
15) Crompton (Rs.110-140)
16) Cummins (Rs.140-165)
17) Asian Paints (Rs.600-700)
18) Financial Tech. (Rs.300-450)
19) Titan (Rs.450-600)
20) Mundra Port (Rs.250-350)

Note: From the above list of 20 Non-core Mid-cap portfolio, investors can select remaining part of the mid-caps stocks to complete their portfolio balance. How much of mid-caps to select will be discussed in my next article.


Extra Notes:

1) Punj Llyod: Looking at the fundamentals & price erosion in stock value of Punj Llyod, the stock would have been included in the ‘Core Mid-cap Portfolio’ category. But since we already have L&T as a part of Large-cap Core portfolio, investors can determine the decision of buying this stock as ‘Optional’ in nature.

2) LIC Hsg. Finance: Even this stock would have easily formed a part of core mid-cap portfolio based on its superior fundamentals, low beta fluctuation & cheap valuations, but for the presence of another stock from the same sector- HDFC Ltd in large-cap Non-core portfolio. Though, investors who have not opted to Buy HDFC Ltd. could certainly include LIC Hsg. Fin in the core mid-cap portfolio.


Dark Horses:

Some stocks can prove as 'Dark Horses' for long-term investors if they are bought at lower levels and valuations. Currently, these stocks may not be in lime light due to some fundamental problems or High Debt problem or Pledge issues or Credit crunch (or if nothing, just that the stock may have melted down on the back of severe bear phase) that some of these stocks may be suffering from. But as and when there is recovery & stabilization in the global market conditions over longer duration, these stocks may fare well if all things fall right for such stocks. These stocks can as well be termed as 'Contra' bets.


LARGE-CAPS:

1) Tata Motors
2) Ranbaxy Laboratories
3) GAIL

MID-CAPS / SMALL-CAPS:

1) Biocon
2) Kalindee Rail
3) Bartronics
4) NIIT Ltd.
5) Time Technoplast
6) Ess-Dee Alluminium
7) Bajaj Financials
8) TV18
9) Hind. Construction
10)Moser Baer


In My Next Post:
I will discuss as to how to arrive at a well-diversified list of portfolio from the above mix of large-cap & mid-cap stocks both. The strategies that could be adopted to get a right mix in terms of sector allocation & (market) capitalization levels of the above stocks. So, in my next posting, don’t miss out on various strategies that could be adopted while diversifying & risk minimization of portfolio.


Share your Favourite Portfolio in the 'Comments' section:

Readers are requested to post their view/query/suggestion on the above PORTFOLIO in the 'Comments' section. Readers can also post & share their favourite portfolio constituents for 'Long-term Investments' in the same Comments section. This will make this posting on Long-term portfolio more interesting, interactive & explore new stock ideas among themselves.


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