Allocate 70% to equities in this fall; Top 5 wealth creating ideas for next 2-3 years

After a setback from Union Budget 2018, the domestic market has shifted focus into the global volatility which is turning cautious due to premium valuation, increase in interest rate and risk of de-globalisation.

   

In the short-term, the market may have a positive bias and during which the investors should consider shifting the portfolio into low beta, Vinod Nair, Head of Research at Geojit Financial Services.

India has gone into a double whammy under the domestic and global headwinds. After a setback from Union Budget 2018, the domestic market has shifted focus into the global volatility which is turning cautious due to premium valuation, increase in interest rate and risk of de-globalisation.

This trend may continue as valuation normalises and bond yield stabilise. For example, India’s government 10-years yield currently stands at 7.77, 49bps up in the last 2months.

Deposit and lending rates are increasing and trajectory of inflation continues to be on the higher side, which augurs further cut in valuation.

In the near-term, RBI is expected to provide additional liquidity to the bond market, which will provide some support to the market especial the financial sector.

The current effective Fed rate is 1.4 percent while the 10-years yield is 2.9 percent. If the US Fed rate is increased by 3times, the effective rate will be 2.15 percent by the end of Dec-2018, if the same spread is maintained the bond yield will increase to 3.65 percent.

The US bond yield has increased by 60bps in the last 3 month, bringing high volatility in the Indian market. Currently, the market is down by about 6 percent, if this situation continues in the global bond market, India will also be impacted.

 To churn your portfolio towards defensive sectors and reducing high beta stocks should be the key for retail investors. In the short-term, the market may have a positive bias and during which the investors should consider shifting the portfolio into low beta.

Profit booking on stocks with premium valuation and increasing in mutual funds debt are also advisable in the medium-term.

Given our moderate expectation on equity markets, we suggest starting with a holding of 40 percent for equity which can be increased to 70 percent over the long-term.

The focus should be more on Mutual Fund schemes predominantly with largecap exposure which investors can increase through diversified multicap funds.

Direct equity can be 10 to 15 percent of the total portfolio with a focus on defensive sectors. For the time being, high exposure is advised on mutual fund debt scheme at 60 percent with corporate accrual funds.

Top five wealth-creating ideas which investors can look at for the next 2-3 years.

HCL Technologies

We continue to remain positive on HCL on a consolidated basis driven by traction in deal wins and strength in Mode 2 & 3 services (focus on next-gen offerings).

Revenue contribution from Mode 2 & 3 services surpassed 25 percent of the total revenue and the management is eyeing to further increase the contribution from digital business to 40 percent over the next few years.

Deal wins remained strong in Q3FY18 with the company signing twenty transformational deals across services. The company’s strategy of augmenting its IP based partnerships with technology vendors to broaden its product offerings is expected to provide a tailwind to revenue growth going ahead. We factor revenue CAGR of 9 percent over FY17-20E.

Aarti Industries

AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. The company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments.

ARTO’s Q3 Revenue grew by 29 percent YoY, led by strong growth across business segments with Speciality chemical business grew by 23 percent YoY, home & personal care business 103 percent YoY and Pharma 35 percent YoY.

Recently, ARTO signed Rs10,000cr exclusive supply contract with a global chemical conglomerate for high-value speciality chemical intermediate over a period of 20 years with the commencement of supplies from the Year 2020.

Going forward, we believe that with strong off-take Pharma segment and stable growth from Specality chemicals segments, we factor revenue to grow 14 percent CAGR over FY18E- FY20E. Given healthy earnings outlook, we continue to have a positive rating on the stock.

Torrent Pharma

Torrent’s acquisition of branded formulations business of Unichem Laboratories will strengthen its presence in the domestic market with expansion in the chronic portfolio, improved market share and widening distribution networks.

Besides recovery in US business is expected to drive robust growth going ahead. Higher revenue growth from Europe is also another positive for the company. Given increased R&D spends for high margin/high-volume products and meaningful new launches for coming years.

Notably, the management has guided for 10-15 ANDA filings in FY18 and also indicated plans to submit 3-4 derma products by this fiscal end. We expect Torrent Pharma’s revenue and Adj. PAT to grow at a CAGR of 14 percent/9 percent over FY17-20E owing to increased contribution from the domestic, gradual pickup in US sales through quality filings and strong growth in Germany, Brazil and RoW.

Idea Cellular

Idea’s focus on the Vodafone merger and accelerating synergistic benefits both in terms of operating cost and capex is expected to achieve a higher level of efficiency going ahead.

The merger process is likely to be completed by H1CY18, we expect synergies to start accruing from FY20E leading to an expansion in EBITDA margin to 28.4 percent in FY20E.

Importantly, the company’s fund-raising will provide Idea with much-needed liquidity to boost network and protect its revenue and market share. Moreover, Idea’s plan to monetise its tower assets will strengthen its balance sheet.

Tata Global Beverages

Tata Global Beverages (TGB), an integrated natural beverage company derives ~70 percent of revenue from branded tea business and ~60 percent of the revenue comes from markets outside India.

TGB has put in place a new strategy to drive growth and profitability including exiting from loss-making geographies. Under the core business rejuvenation, TGB will expand its product offerings in premium and non-black categories and enhanced its focus on green and herbal tea categories (higher margins).

It is also planning to foray in large tea consuming Asian markets such as Singapore, Malaysia, and China. To renew Nourishco (JV), TGB launched several new products/variants under Tata Gluco Plus and Himalayan water brands.

We expect TGB to gain market share across geographies led by its innovative premium product offerings and expect revenue/PAT to grow at ~6 percent/23 percent CAGR over FY17-20E.

MORE WILL UPDATE SOON!!

Heads up! FIIs create fresh short in index futures of over $145 mn

On the data front, continued writing was seen at OTM (out of the money) Call strikes of 10300 and 10400. We believe that levels near 10,350 will pose as an immediate hurdle for the Nifty.

   

Indian markets remained under pressure and did not witness any major pullback despite a recovery seen in the global markets. The Nifty50 ended the week with another 2.4 percent loss at 10,225. It is the lowest weekly closing since the first week of December 2017.

While banking remained a major laggard, auto and metal stocks also succumbed to the pressure while long liquidation was observed across sectors.

Only because of the pullback among select heavyweights like Reliance Industries, HDFC and L&T and the Nifty50 was able to end above 10,200 this week while most index stocks closed in the red.

The market breadth has remained weak throughout the week. Despite a recovery of almost 100 points on Thursday, a negative breadth clearly suggested prevailing scepticism in the market. Thus, selling pressure may continue at higher levels in the coming sessions.

On the data front, continued writing was seen at OTM (out of the money) Call strikes of 10300 and 10400. We believe that levels near 10,350 will pose as an immediate hurdle for the Nifty.

Till these levels are not taken out, any major recovery seems unlikely.

As fresh shorts are not evident in data, any change of bias in the Nifty may be seen only if fresh long additions were observed or Call writers start unwinding their positions.

At the same time, sudden depreciation in the rupee also weighed on equities as it moved above 65 against the US dollar once again.

 

Bank Nifty: 24000 remains crucial for the coming week

Volatility remained extremely high for banking stocks because for the third week in a row there was no respite for PSU banks. The index corrected sharply and moved towards 24,000.

However, on the weekly expiry day, the index witnessed a sharp bounce on the back of short covering and moved towards 24,500. However, once again towards the end of the week, it turned negative and ended well below 24,500.

As implied volatilities (IVs) remained high, huge volatility was seen in OTM options. Call option premium rose nearly 70 percent on the weekly expiry day whereas in the absence of any follow-up buying, premiums got eroded significantly and fresh writing positions were seen forming in 24600 and 24700 Call, which is likely to keep the index move in check.

However, on the Put side, major open interest concentration was seen in 24000 strike, which is likely to be a support in the coming week. A close below these levels would open the gates for more downside.

The current price ratio, Bank Nifty/Nifty remained intact near 2.38. As the index has a major hurdle near 24,700, we feel that unless the index moves and closes above these levels, the ratio is likely to consolidate near the same levels. Eventually, it is likely to slide towards 2.35 levels.

Price recovery in EMs not supported by FII inflows

Adverse news flows globally and domestically kept the strong recovery in risk assets in check. On the global front, there was news of tariff plans from US administration and a populist vote in Italy.

On the domestic front, the PNB led fiasco kept the Indian market's recovery in check. MSCI World and MSCI EM Equity Indices recovered almost 2 percent each (outperforming the Nifty).

The recovery in emerging markets (Ems) was not backed by fresh FII inflows into EMs. Outflows amounting to around USD 200 million each were seen from Indonesia, South Korea, Thailand, Taiwan, and Brazil.

Hawkish tones emanating from US Federal Reserve and ECB’s hawkish ECB assessment of quantitative easing (despite the populist Italy move) has partly kept EMs up move in check.

In the Indian equity segment, FIIs had continuously sold in February. The trend at the start of March is not very encouraging yet.

In the last five sessions, as per the Sebi data, their buying aggregated to a paltry sum of USD 16 million. They created fresh short in index futures segment amounting to over USD 145 million.

Portfolio hedging was also strong as they bought index options worth over USD 450 million.

On the watchlist will be Donald Trump’s tariff plans and stability in the risk sentiment for risk assets. Unless these variables stabilise, EMs are unlikely to see any meaningful inflows from FIIs.

MORE WILL UPDATE SOON!!

Betting on tech theme? Top 4 stocks which investors could add in their portfolio

The association of Indian IT companies are expecting a strong growth in the fiscal year 2019 as most of the companies are able to adapt to the new age digital technologies and are also strengthening in the automation segments which could make the space as one of the strong sectors for the year 2018.

  

India IT sector has emerged as an outperforming sector in the recent correction. The S&P BSE IT index rose nearly 10 percent compared to 1 percent fall seen in the S&P BSE Sensex so far in the year 2018.

Most experts are turning favourable towards the India IT sector in the near-term as they see the pain in the sector is priced in and with expectations of some more rupee depreciations, the sector is likely to hog some limelight.

The association of Indian IT companies are expecting a strong growth in the fiscal year 2019 as most of the companies are able to adapt to the new age digital technologies and are also strengthening in the automation segments which could make the space as one of the strong sectors for the year 2018.

"Even the tailwind of weakness in rupee against the dollar over last few weeks is also likely to add to their top line numbers. Hence select largecap and midcap IT stocks have much more potential to outperform in the coming quarters.

The calendar year 2018 is likely to be better than 2017 which could drive re-rating. However, the magnitude of acceleration will determine stock returns from here, suggest experts.

A 2-3 percent higher growth in FY2019 is already baked into the stock prices. The path to the higher acceleration of 4-5 percent can lead to further upsides, Kotak Institutional Equities said in a note.

“It is easier to predict the direction of growth than the magnitude of acceleration in our view. We prefer Infosys and Tech Mahindra as expectations embedded in the current valuations are low,” it said.

Kotak Institutional Equities has an ADD rating on Infosys, L&T Infotech, Mindtree and Tech Mahindra.

 

Indian IT companies expressed hopes of a better FY2019 led by – (1) a better macro environment across key goes, especially North America, (2) better deal flow for some, (3) pipeline of projects and deals and (4) increasing digital deal sizes, companies said on the sidelines of a conference organised by Kotak.

Companies did not quantify the magnitude of improvement although they were optimistic across verticals except in banking and retail where commentary differed.

Nearly all IT companies indicated that simplification and digital transformation of the core will drive up digital deal sizes. “Companies expressed confidence of maintaining margins in a guided band (TCS and Infosys) or improving it (Wipro in the medium term and Tech Mahindra in FY2019),” said the Kotak note.

The note further added that confidence in margin performance emanates from the pricing environment that has not thrown any unexpected surprises, benefits of automation and deriving leverage from investments already made in digital services.

Key takeaways from individual companies from Kotak Institutional Equities annual conference:

Infosys:

Infosys believes that increase in interest rates in the US, tax cuts that can potentially prop spending and a strong macro environment bode well for growth in FY2019. A positive macro can translate into better growth in FY2019 although the company believes it is too early to quantify the magnitude.

Traditional levers such as utilization are maxed out. The onsite mix can reduce and help margins. In addition, L1 and L2 automation can be adopted across a wider range of offerings.

Finally, the share of new services (10 percent of overall revenues) that are in an investment phase, can start contributing to margins after they achieve a particular scale. KIE view is that margins will move in a narrow band in the foreseeable future.

Tech Mahindra:

FY2018 has seen the rationalization of clients and unprofitable portfolio of business leading to impact on growth rates; communication practice will see negligible growth or even decline. Without this rationalization, FY2018 telecom revenue growth would have ranged 5-6 percent.

None of the large clients had a renegotiation in rates/pricing setting the platform for a return to growth in FY2019. Without factoring upside from 5G, mid-single digit revenue growth is possible in communications in FY2019.

Tech Mahindra believes that capex cycle and investments in IT are closely linked. Investments in 5G capex would spur IT spending, per the management.

L&T Infotech:

L&T Infotech’s management has guided for mid-teen growth in FY2018E and is optimistic about continued momentum in FY2019E led by (1) market share gains in top accounts, (2) solid deal wins in the recent past (one USD 100 million+, four USD30-100 million and five USD10-30 million deals), (3) an improving deal pipeline, and (4) addition of new logos—82 new logos added in the past 12 months and 3 of the top 10 deal wins are from new logos.

Growth in FY2019 will be powered by top-20 accounts as well as new logos. From a vertical standpoint, BFS, media and hi-tech and retail CPG verticals will growth faster than the company.

On the services front, analytics, enterprise integration, and mobility, ES and IMS will drive growth. The management expects the growth momentum to continue in CBDT project.

Mindtree:

Mindtree is seeing healthy demand across RTB (run-the-business) and digital portfolios. On RTB front, TCV growth is healthy, pricing is stable and large projects have stabilised after ramp-up.

On the digital front, Mindtree is witnessing benefits of an increase in average deal sizes. The management indicated the deal pipeline is improving and Mindtree’s deal win rate has improved to 34 percent from 22 percent (deals won out of the total deals tracked by Mindtree internally).

It is winning more deals through the advisory channel. Improving deal wins rate should reflect on TCVs in the coming quarters.

Mindtree has retained its sequential revenue growth guidance in dollar terms in Q4FY18 to be broadly similar to Q2 (3 percent) and Q3 (3.9 percent). The management expects EBITDA margin to be flat sequentially at about 15.1 percent.

MORE WILL UPDATE SOON!!

Stuck with huge portfolio losses? Use ‘Options’ in a falling market

Buying Puts is a simple strategy where an At the Money put is bought on the Index like Nifty with a notional value of the portfolio adjusted for portfolio’s beta.

  

Options being a non-linear instrument can help investors/traders in multiple ways and here are some of the simple strategies to be deployed in a falling market.

Want to protect your portfolio from downside?

One of the ways investor’s uses options is for Hedging. Market corrections are fierce and steep and to protect the downside investors are at times willing to buy protection with a premium outflow i.e. at a cost.

Long Puts

Buying Puts is a simple strategy where an At the Money put is bought on the Index like Nifty with a notional value of the portfolio adjusted for portfolio’s beta.

This is a fairly expensive strategy but the protection is open for an unlimited downside and for the time period of protection the investor doesn’t need to bother much about any steep correction.

Buying Spreads

Deploying spreads like a Bear Put Spread, Bear Call Spread, etc. may be a better choice if the hedging is intended only up to a given level. For example Mr. A wants to protect his portfolio for any downside up to 9700 on Nifty where he’s confident of the Index reviving.

In this case, Mr. A doesn’t need to pay the premium of unlimited downside by buying a simple put and can reduce the premium outflow by deploying a spread which will cost lower than a long put. The trade-off is an open risk below the lower strike of the spread.

Don’t want to sell or hedge the portfolio but want to generate some returns to compensate the fall?

Hedging comes with a cost and no matter the portfolio falls or not, you are certain to spend the cost of hedging out from your pocket. This is not so lucrative to few investors and instead, they choose to generate some additional returns on the portfolio to compensate the downtrend.

To achieve this, covered calls can be deployed on stocks in the portfolio. Calls of stocks held in portfolio are sold with strikes at key resistance levels. This generates some returns with very limited risk.

If the stock moves up, the investor gets some returns in the stock till the strike plus the premium received and as he’s already holding the stock it can be delivered against the sold call.

In an event where the stock doesn’t move up, there is an additional return in the portfolio of premium received from the sold call option.

Traders expecting an immediate correction

For traders expecting an immediate correction and wants to benefit from that, Long put can be a simple strategy to deploy. Predicting a market downside and using options to trade is more rewarding than predicting an upside.

Volatility increases in the case of a fierce down-trend and long options are positive volatility which means that put options will increase in value due to the market correction and will additionally increase due to the rising volatility, making it more lucrative and naturally rewarding to trade corrections.

Traders expecting a gradual downside

A slow and gradual downside comes with a lot of Theta decay in the bought single options for eg. Long Puts. Hence, the idea is to reduce some of the theta decay by selling another option.

In these situations, buying a spread may be more beneficial than buying a single put option. This can be achieved by deploying one of the few strategies like Bear Put Spread, Bear Call Spread, Put Ratio Back-spread, Ratio Spreads, etc.

MORE WILL UPDATE SOON!!

Rising interest rates & volatile stocks: Asset allocation to hold key in perfect storm

Here are a few interesting reads that will help you put your money matters in order in the volatile times.

  

After State Bank of India, the banker to the nation raised interest rates on bank fixed deposits, other banks are expected to follow. While the interest rates are expected to go up, investors are worried about the ongoing correction in stocks.  Experts ask them to stick to their asset allocation strategy and do not rush into selling off their investments or even going overboard with stock purchases.

If you are contemplating an investment in equity mutual funds and wondering if you should go for large cap fund or mid cap fund, here is a way out.  The experts point out that large caps are relatively attractively valued as compared with the mid-caps. Though the mid-caps are expected to deliver better returns, large caps stand to weather the storm better.

As we move towards the last fortnight of the financial year FY2017-2018, it is time to look at the pending works. If you have not filed your income tax returns for the previous year yet, do it now. Here are the tips to file your income tax returns.

If you have missed investing in tax saving funds or ELSS earlier this financial year, and you are looking to invest in tax saving funds with an intention to cut down income tax, here are a few things you must know.

Though most corporate entities showered the women with multiple benefits and discount offers on the Women’s Day. But that should not lead to a one day act. Women must take charge of their finances. Here is how they can draw their financial planning road map.

As we are closer to the current financial year, you may be considering a higher contribution towards voluntary provident fund. But do hold that thought for a moment. Here is a better option.

If you are a millennial and wondering what you should be doing with your money so that you can remain ahead of others, here are a few simple tips.

You should stick your asset allocation and keep investing as per your financial goals. While you work hard to earn to fund your financial goals. Do not forget to buy adequate amount of life insurance. In case of eventuality, the life insurance proceeds will ensure that the family’s financial goals are not compromised due to breadwinner’s absence. Here is how to utilise the proceeds received under a life insurance claim settlement.

MORE WILL UPDATE SOON!!

RBI may hike repo rate by 0.25% in 2018: Report

The Reserve Bank is likely to increase its key rates by 0.25 percent this year as inflation is expected to be at a higher range due to wide fiscal deficit and high prices of oil and farm produce

  

The Reserve Bank is likely to increase its key rates by 0.25 percent this year as inflation is expected to be at a higher range due to wide fiscal deficit and high prices of oil and farm produce, a report said today.

The headline consumer price inflation (CPI) will not breach the 6 percent mark which is the upper end of the target band for RBI, but a moderation towards the 4 percent target is also "unlikely", Care Ratings said in a report.

The main concerns today are on both the demand and supply sides," it said, elaborating that higher fiscal deficit is the main issue on the demand side, while the proposed higher MSP (minimum support price) of farm products, oil prices and house rent allowance are potential supply side threats.

A 0.25 percent hike in repo rate is expected during 2018. The key repo rate at which it lends to the system stands at 6 percent currently.

It can be noted that the RBI shifted its policy stance to neutral last year, after being in the accommodative phase for over two years. After rising to 5.21 percent in December, inflation cooled-down to 5.07 percent for January.

The RBI expects inflation to go up to between 5.1-5.6 percent in the first half of the next fiscal or the April-September period, before cooling down.

In its report, Care Ratings said that the picture on inflation will be clear only after the monsoon rains.

The agency said the market will not be spooked if the hike in policy rate comes in as it already seems to have factored it in.

The RBI had left the key rates unchanged in its last policy announcement in February, but cited risks on inflation which had led many to term it as a hawkish policy document.

MORE WILL UPDATE SOON!!