Is the market valuation attractive now?
Yes, from a valuation point of view, the Sensex is at about 13 times one-year forward earnings or 2.6 times trailing price to book. It is now attractively valued. It will be fair to assume that in the near term markets will be very volatile with downward bias as deterioration in macro and the global turmoil will keep investors on the edge. However, the first signs of actions being taken to support growth, containing deficits and correcting macros will be a great opportunity to go overweight in equities. My recommendation is to strictly follow an asset allocation suitable to your risk profile and buy in a falling market. This market may turn out to be a buy-on-dips rather than sell-on-rallies market if corrective actions are taken in the near term.
In your opinion, which sectors are looking interesting as we enter the new year?
One will have to create a blend of high-risk high-return (aggressive) and low-risk low-return (defensive) sector allocation. In the defensive space, pharmaceuticals and export-oriented companies, especially in technology and engineering sectors, are worth investing in. For the aggressive allocation, one can look at companies in the small- and mid-cap space that have been in existence for some years (or whom your wife and kids know of), which do not have too much of debt, whose future growth is reasonably assured, and which are trading at less than five times one-year forward earnings. The aggressive portfolio will be like catching a falling knife in the near term but it’s a risk worth taking with discipline.
Which sectors would you stay away from?
I would recommend readers stay away from companies that are highly leveraged, whose leverage has gone into creating projects at inflated cost, and which are unlikely to be operational in the near future. One should also avoid sectors where the business model depends upon extra concessions from the government, like real estate and select infrastructure projects. Your focus should be on investing in companies that are working for all the shareholders rather than just for the promoters.
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