Narendra Modi win: How to build your investment portfolio

The victory of the BJP-led National Democratic Alliance (NDA) in parliamentary elections has triggered a bull run in equity and currency markets. Analysts are already predicting the 'mother of all bull runs' in Indian equities. Some are even forecasting that the rupee will appreciate to 55 a dollar. Amidst all this euphoria and changing investment landscape, how should retail investors view different asset classes and build a portfolio?

Equities:

Between May 12, when the exit polls hinted at a comfortable victory for the NDA, and May 19, the Sensex jumped close to 6% from 22,994 to 24,363. On the day of the results, the Sensex breached 25,000 before settling at the 24,100 level at the close of day.

Despite the run-up, the valuations are still at a fair level and experts see the bull run continuing at least for a year. Large brokerage houses have already revised upward their year-end target for the Nifty and the Sensex. Nomura has raised its 2014 target for the Sensex to 27,200 from 24,700, while Citigroup raised its year-end target to 26,300. Though the stock market sentiments are positive, the investment strategy has to be different from what it was six-eight months ago in order to make gains. The sectoral outlook has changed, and so has outlook for stocks of different market caps.

The large-cap and defensive sector bias has to give way to a high-beta, cyclical and mid- and small-cap strategy to gain in the short and medium term. Sectors such as energy, PSU banks, infrastructure and metals are back in focus as pharma, FMCG and IT stocks look for a correction in the short-term. The infrastructure sector may see a boost in the long-term, but analyst remains cautious on the sector. The focus is also on PSU oil companies such as ONGC, Oil India, HPCL and IOC as steps like rise in gas and diesel prices, lowering of subsidy burdens are positive for these stocks.

The debt market has not shown the same kind of exuberance as the equity market as it is still cautious about the next government's fiscal policies. Analysts feel the new government may have to borrow more by issuing bonds in the short term, thereby keeping the fiscal deficit high for some time. This has led to fall in bond prices as 10-year government bond yields rose to 8.9% from 8.83% on May 16. "We find these fears (the government may borrow more) unfounded. We believe that the government would go on the path of fiscal consolidation and sooner or later bond yields will fall," says Dhawal Dalal, fund manager, DSP BlackRock Mutual Fund. He sees 10-year government bond yields at 8.5% by December this year. Retail investors, depending on their risk tolerance, can invest in accrual funds (short-term funds, FMPs) or duration funds. Accruals funds (which follow the hold-to-maturity strategy) have given good returns in the past couple of years and can still do well if invested at these levels.

Gold:

Though gold prices are internally driven, the metal gained domestically last year due to rupee depreciation and import restrictions put by the government to control the current account deficit (CAD), a situation where imports exceed exports. However, with improving CAD due to which the new government may ease certain restrictions, and appreciating rupee, gold prices are likely to correct in the 6-12 month period. "Prices will depend on three factors: international prices, rupee movement and government policies vis-a-vis restriction on gold imports. If the new government eases these import restrictions, domestic gold prices are likely to come down in the short term," says Chirag Mehta, Fund Manager, Quantum Mutual Fund. However, he says that in the long-term, sentiments remain favourable for gold.