Mastering the Bulls

Since the beginning of 2017, the market has been rising steadily largely due to sensible and pragmatic government policies, and the heightened appeal of financial assets compared to mere physical ones. The Indian economy is traversing an upward course where both macro and micro-environments are turning out to be vastly beneficial. As a result, the market valuation on price-to-earnings basis is quoting a tad above fair value. Understandably, there are concerns regarding the stability of the current surge and there are three options investors can consider depending on their risk appetite. But before that, one should understand the current environment.

The Indian economy has come a long way from the problems it had faced earlier. The gross domestic product (GDP) has risen from 5.6 per cent in financial year (FY) 2013 to an estimated 7.1 per cent in 2017. Inflation is down from 10.1 per cent in FY13 to (an estimated) 3.2 per cent, thanks to lower oil and commodity prices. Forex reserves have ballooned, from $262 billion to more than $360 billion at present. In fact, all this growth is happening due to shrinking oil prices and swelling foreign direct investments as India is one of the few fast-growing economies in the world. This has also resulted in the current account deficit coming down to the manageable level of one per cent of the GDP.

Another positive is sound government finances. The latest budget pegs the fiscal deficit at 3.2 per cent, with a target of 3 per cent for 2018/19.

Structurally, Indian macros are benefiting due to four strong foundations - government reforms, rate cuts, improved fiscal and current balances, and the formalisation of economic activity due to demonetisation and the goods and services tax (GST). There is a strong likelihood that investors will increasingly look at financial assets as the macros support this broad direction.

Substantial flows, both from domestic and foreign investors, may also continue. The inflows are driving the markets to a small but meaningful rerating, and consolidating and creating a new base. Thus, the bull market should not be seen merely through the lens of exuberance, but surely as one backed by sturdy fundamentals.

Given the pent-up demand waiting on the sidelines, the market's rise has been swift and equities, as measured by the price-equity valuation yardstick, are no longer cheap. Due to these higher valuations, markets will be prone to greater choppiness.

So, here are three options one can consider to stay ahead:

1. Investors can make lump sum investments in the dynamic asset allocation funds as they offer a mix of debt and equity and tend to be less volatile. For bigger bets, invest in a balanced category and dynamic asset allocation funds as these can deliver better risk-adjusted returns.
2. One of the best investment tools is the systematic investment plan (SIP). If you have signed up for one, continue with it for the next three to five years. You can even extend one-year and two-year SIPs to five years. The end corpus should be worth your while.
3. Among themes, the infrastructure sector clearly stands out as an investment destination. This sector should do well in the next three-four years as the government is increasingly supporting it in a bid to improve the country's infrastructure. Over the past two years, some of the leverage issues and stuck projects have been addressed, albeit slowly. Investments are now returning and valuations are compelling enough. Hence, investors with a three-to-five-year horizon may opt for this segment.

By, Nimesh Shah, CEO and MD, ICICI Prudential Mutual Fund