Stock market rally a surprise; here is how to take advantage

Most people on the Dalal Street are surprised by the ongoing rally in the Indian markets. While there was a considerable negativity a couple of months back, indices seem to be in no mood to give up. But the same can’t be said about the broader markets.

Despite difficult conditions, India’s economic growth soared to a two-year high in the April-June quarter, supported by solid expansion in manufacturing, farm sector and increased consumer spending.

Of course, a part of it has to be attributed to the low base effect of last year as the economy was battling the twin effects of demonetisation and GST implementation. The sustainability of this growth is a key factor to watch for.

The most critical missing link which was conspicuous by its absence was the much awaited corporate earnings revival.

One of the important takeaways from this earnings season was the peaking of asset quality stress for corporate banks.

Consumption has shown remarkable traction, especially in rural areas and is reflected by robust volume growth in FMCG, auto, electrical goods etc. There are other tailwinds like a pick-up in the industrial activity, infra boost and pre-election spending.

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Rather than timing or anticipating fall in markets, one needs to be alert to tap opportunities which arise due to market volatility. A constructive approach to buying good businesses during smaller corrections is what one needs to focus on.

Companies with pricing power, sustainable competitive advantage and market leaders are excellent bets for the longer term. Preferred themes would be playing the consumption growth of an aspirational population & financials which will see huge penetration.

Between low-quality businesses at a cheap valuation and high-quality businesses at a fair valuation, the preference is always for the latter since it comes with peace of mind and higher stress-adjusted returns.

The way to go is “Don’t only be proud of your salary or income, be proud of your investments too. Investments work for you harder while you work hard.”

By, Devang Mehta
The writer is head of equity advisory, Centrum Wealth Management

Source: DNA Money