Go for ‘Calibrated Accumulation’

The market has entered an interesting phase. There are tailwinds and headwinds in the path of market’s journey. We feel, at this juncture, investors should take a clearheaded stance on investment, without speculating on the probable tailwinds and headwinds that might impact the market in the short-term.

 Narrow rally lifts Nifty above 11000

Nifty conquered 11000 again on 6^th February, breaking a five month range. The resistance at 10800 has been broken by this rally, led by huge delivery-based buying in a few stocks. It is important to appreciate the fact that this is a very narrow rally led by a few stocks. Presently six stocks – HDFC Bank, HDFC, Reliance, TCS, Infosys and ICICI – account for around 50 percent weightage in Nifty. If we add ITC and Kotak Bank to this list, the weightage would be 60.7 percent. Nifty’s impressive performance is due to the strength of these stocks.

Carnage below the surface

If we look below this impressive Nifty surface, there is carnage in the broader market, particularly in mid- and small-caps. As I write Nifty has given 5.12 percent YTD returns; but Nifty Mid-cap is down 20.29 percent and Nifty Small-cap is down 33.69 percent. This explains the complete absence of jubilation in the market.

Why this bi-polar market?

Perhaps the most important development that facilitated this bi-polar market – a few stocks leading the rally while others languishing – is the change in monetary stance of the US central bank. The Federal Open Market Committee (FOMC) Meet held during end January not only kept interest rates unchanged, but also indicated that rate increase was on hold due to concerns over global growth. The US 10-year yield fell to 2.66 percent and the dollar index weakened.

This dovish Fed stance has facilitated a risk-on in markets: resumption of investment in risky assets like equity, corporate bonds, Emerging Market equities and some currencies. Lot of money is flowing into Exchange-traded funds (ETFs). High quality large-caps with good earnings visibility are attracting huge delivery based investment buying. This has been the prime mover of the rally which took Nifty beyond 11000.

The most important event of the year is the general election. There are reasons to believe that the market is presently discounting an election outcome in line with some of the recent opinion polls.

RBI turns pro-growth and cuts rates

While the change in RBI’s monetary stance from calibrated tightening to neutral was on expected lines, the rate cut took some sections of the market by surprise. The decision to cut the policy rates is a clear indication that the central bank is now giving lot of importance to growth.  This approach can be justified in the context of the RBI consistently undershooting its inflation forecasts. Though the stance is neutral, the tone of the policy is distinctly dovish. One more rate cut is possible in CY 2019; of course, it will be data dependent. This accommodative monetary stance augurs well for the markets.

Meanwhile concerns regarding global growth and global trade continue. Domestically, there are concerns regarding the fiscal deficit, stemming from the welfare initiatives of the interim budget.

Go for ‘Calibrated Accumulation’

Investors are advised not to panic from market corrections. Many investors feel that the market will crash after the elections and that would be the time to buy. Experience tells us that this approach is faulty. Actually those who invested before the elections made money. Investors should continue with their SIPs and scale up their SIPs, if possible. Quality stocks may be bought in installments: “Calibrated Accumulation” should be the ideal investor stance, going forward.

Posted: February 2019