Increase equity investments; multi-year bull run in making, large caps may shine: Analysts

It is a multi-year bull market in the making, supported by declining bond yields, resilient bank balance sheets, and healthy earnings

India’s key stock indices surged to fresh record highs as investors cheered the US Federal Reserve's dovish commentary and its decision to keep interest rates unchanged. While the markets had priced in the status quo, the Fed’s comments on probable rate cuts next year sent bulls on the prowl, pushing the Sensex over 1,000 points higher and taking the Nifty beyond 21,200 intraday.

In light of favourable macros and the recent state election results raising expectations of policy continuity in 2024 after the general election, the markets are likely to see more highs in the near future if bond yields and crude oil prices decline or remain stable, analysts said. For investors looking to re-evaluate their portfolio, analysts advise increasing investments in equities.

According to Rohit Murarka, a partner at Kotak Cherry, a multi-year bull market is in the making, supported by declining bond yields, resilient bank balance sheets, and healthy earnings. Foreign institutional investors (FIIs), who have been dormant this year, are now likely to flock to domestic equities and turn active buyers, particularly in frontline stocks, contributing to an anticipated rally in large caps.

Also Read | Nifty, Sensex hit fresh highs on Powell booster, rally still has steam left

Despite the positive indicators, determining the remaining momentum in stocks after a significant run-up remains a challenge. Nevertheless, prevailing projections by analysts suggest the likelihood of continued upward movement in the markets over the next two months.

Asset allocation

Murarka recommended increasing exposure to equities, particularly large-caps, by 10-20 percent. Investors can consider allocating new funds to large caps, trimming 10-20 percent from small/mid-caps in existing allocations, and redirecting them to large caps for an optimised portfolio.

However, he noted that even after a stellar run in 2023, mid-caps and small-caps might still do well. But relatively, frontline stocks or indices look much better from a valuation comfort perspective.

Vikas Puri, a partner at Complete Circle Capital, recommended investing in a staggered manner. The ideal portfolio should be a mix of large-caps and mid-caps, he said, adding that it should have 40 percent exposure to large-caps, 40 percent to mid-caps and 10-20 percent to small-caps.

"If you are younger and have a larger time horizon, then small-cap allocation can be slightly higher," he added.

Also Read | Powell turns Santa but questions remain over when the rate cut cycle will kick off, says this global market economist

Those with fresh funds to invest should not book profits and move to an entirely new asset allocation as tax liability will come into the picture, Puri told Moneycontrol.

"Fresh funds must be allocated to the existing portfolio, as per exposure. Multi-cap, mid- and large-cap, flexi-cap funds should be looked at," he said.

Fixed income avenues

On the fixed income front, Murarka said corporate bonds, particularly those with AAA ratings, are compelling for reasons including healthy corporate earnings without dangerously leveraged balance sheets.

For a normal corporate bond fund, which is largely dominated by AAA-rated securities, one can assume that yields will stay at 7.5-8 percent. For investors comfortable with a slightly higher risk, there are credit risk funds, where yields will range from 8.5 percent to 9 percent.

Additionally, investors may benefit from the spread between corporate bonds and government securities. When the rate cut cycle begins, the G-Sec yields will likely fall first. Corporate bond yields will start falling only after a decent move in G-Sec yields.

“We expect that for the next year, a major part of gains in corporate bonds should happen out of accrual or carry income and not so much on capital gains. One year from now, maybe there will be capital gains as well. But for the next year, a large part of the profits will be made through carry income," Murarka told Moneycontrol.

Also Read | Fed’s change in stance will trigger a solid rally in largecaps: Saurabh Mukherjea

Puri of Complete Circle Capital said, "If you don't have risk appetite, then gilt funds make sense because there will be capital appreciation on the bonds with higher yield to maturity."

One can expect 8.5-9 percent return, which is better than bank fixed deposits. In the case of gold, sovereign gold bonds make more sense than physical gold, he added.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions