Breadth of the market rally is narrowing. Where to invest?

The breadth of the ongoing market rally is narrowing with the number of stocks generating positive returns within the Nifty500 universe decreasing from 452 in Q1FY24 to 268 in Q4FY24, according to Motilal Oswal Private Wealth.

In the March quarter, 70% of largecap stocks generated positive returns vis-a-vis 57% of midcap and 45% of small caps, the report said.

“The domestic equity market is witnessing in terms of performance of market “Shifting Tides” capitalizations, sectoral performance and equity mutual funds inflows,” said Ashish Shanker, MD and CEO at Motilal Oswal Wealth Limited.

The report said that between April 2023 to January 2024, around 47% of the Nifty500 universe generated more than 50% returns & nearly 20% of the universe more than doubled their stock prices. Most of this action was witnessed in mid and smallcap categories. This led to valuations (Price/Earning ratio) within these categories trending much higher than their respective long-term (10-year) averages, leading to expectations of shifting tides.

In February and March, 63% of the midcap and 70% of the smallcap universe witnessed negative returns. Within smallcap space, 24% of stocks fell more than 15%. On the other hand, two-thirds of the largecap universe delivered positive returns in the same period.

The trend of net inflows in equity mutual funds continues to remain healthy. Since August 2023, the combined categories of multicap and flexi cap funds have witnessed the highest inflows while the midcap and smallcap fund categories have seen a declining trend since October 2023. Motilal Oswal Private Wealth’s (MOPW) Temperature Gauge Index shows that large caps are in a fair valuation zone. For incremental allocation to equity, MOPW suggests investing in lump-sum with a bias towards largecap and multicap strategies across MF, PMS, and AIF platforms. For select mid and smallcap strategies, investors can adopt a staggered approach over the next 6-12 months. The report in its fixed income portfolio strategy said MOPW continues to hold its view to increase duration in the fixed income portfolio to capitalise on the softening of yields in the next 1-3 years. Around 65% – 70% of the portfolio can be invested in combination of:

  1. G-Sec roll down strategies through a combination of 10 – 14 years’ maturity Bonds/Funds and for 20 to 30 years’ average maturity prefer to invest through G-Sec MFs.
  2. Equity Savings funds which aim to generate enhanced returns than traditional fixed income along with moderate volatility through a combination of equities, arbitrage and fixed income instruments.
  3. To improve the overall portfolio yield, 30% – 35% of the overall fixed income portfolio can be allocated to select high yield NCDs, Private Credit strategies & REITs/InvITs.
  4. For liquidity management or temporary parking, months) Arbitrage/Ultra Short Term (min 6 months)/Liquid (1-3 months)/Overnight (less than 1 month) strategies.

The report also focused on gold and silver. Gold prices have witnessed a surge in recent months, attributable to demand from China and ongoing geopolitical events. Allocation to gold can act as a hedge against any heightened volatility in a portfolio constituting risk assets. Silver continues to have a strong demand outlook because of factors like industrial demand boost in manufacturing and industrial activity in China, and a potential for pickup in green tech, etc.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)


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