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The Premise: The prevailing uncertainties with regard to world trade especially USA's tough protectionist stance and erratic market behavior including that of the mother market of USA, combined with the outcome of recent Lok Sabha by polls, dramatic bank scams, a hardening liquidity and interest rate scenario globally and domestically carry negative implications for Indian stocks. At the same time recent results and data points suggest that there are green shoots for India Inc., at least for some of the larger well managed private sector corporates. The demons of demonetization are now a thing of the past, GST regime is stabilizing and profitability with growth seems to be returning.

In this confusing scenario does an HNI exit his equity portfolio and if he does what happens if things calm down and the markets again become benign? Or does he bravely stay with mid caps / large caps / equity mutual funds etc and rue his situation if the market indeed goes down big? While I do not have a crystal ball to gaze into the future and correctly predict the markets, I do think over the next year or so till the outcome of the next general elections probably sometime in May 2019, it is possible that stocks will not see the smooth up-move witnessed in the last two years. Markets could turn volatile and choppy but within a say +- 6 to 7% Nifty range from current levels. Such an outcome could throw up profit making opportunities, albeit muted, in comparison to the recent past.   

Based on this premise the article attempts to outline a possible portfolio strategy. Since it involves using multiple contracts of derivative instruments to generate income  and / or hedge the folio, it would require significant monetary commitment and hence directed towards an actively managed *HNI Portfolio. Supporting such a strategy is the fact that with the imposition of LTCG in the last budget, the benefit of  long term holdings over short term ones has substantially diminished especially from the viewpoint of HNI's.

The Construct: The portfolio construct assumes that the markets may be volatile but essentially remain in a range of say 9500 to 11000 on the Nifty and that there may be some safety as well as scope for appreciation in liquid large cap names. Accordingly a set of 15 to 20 scrips would be selected.

No PSU would be included in the folio ............. PSU Banks are full of rotten apples with worms suddenly crawling out even from previously perceived better names aka NIMO@PNB. In most cases NPA's are unacceptably high and they just do not have the DNA to match up to private sector banks which have already crossed the inflection point where they will overwhelm PSB's sometime in the not un-foreseeable future. Even the few relatively better ones which could otherwise qualify as valuation picks run the risk of being suddenly compelled to bail out their sick brethren. The large oil & gas PSU's may face sudden prospects of subsidy burden if oil prices shoot up. In any case they appear to be adequately priced. Other large PSU's tend to be performance laggards compared to their private sector cousins. Hence..........No PSU's.        

To qualify as a pick the corporate must be of large size with well established management credentials and be counted amongst the sector leaders. It's debt should be visibly serviceable over the next few years even accounting for a sector downturn and borrowings should not have increased disproportionately to net worth over the last 5 years. It should have displayed consistent and sector leading growth over the past 3 to 5 years with similar prospects over the coming 2 to 3 years. Understanding the modus operandi for usage of derivative instruments for portfolio construct / income / hedging would require the reader to have some knowledge of  such instruments and for further detailing in this regard the author may be contacted with the clear understanding that it would only be provided for academic purposes and not be construed as investment advice.

At this point it would be sufficient to mention that the instrument used would be for income / position generation only where the portfolio would have the ability to either tender or take delivery of the underlying scrip if required. In case of an index based instrument it would be pure options purchases at a defined cost and consequent liability.

While specific scrip names have been with-held, broad sector allocations and the rationale thereto are given below.

Financials: If one believes in the long term future of the country, its economy and the stock markets then a substantial exposure to financials is a must since these companies are an intrinsic part of all economic activity. This sector generally receives 25% to 35% of allocations. In line with this thinking the portfolio would comprise of 3 to 4 scrips from BFSI space (Banking , Financial Services & Insurance)  with an allocation of 40 to 50 lacs.

Infrastructure & Basic Manufacturing: Infrastructure & Basic Manufacturing companies (engineering, construction, metal producers, cement etc) have gone through some rough years mainly because:-

1) In some segments there was serious impact from imported dumps

2) Some had substantial overcapacity issues and consequent lack of pricing power

3) Lack of private capex due to subdued demand expectations and existing over capacities combined with limited order flows from the government sector. However since 2019 general elections are approaching and invariably the ruling dispensation tries to show case its developmental achievements, orders from the government sector have started flowing and expected to gather further momentum. Muted capacity expansions has meant that some pricing power (e.g steel sector) has returned. Some green shoots are visible in the last set of quarterly results and should gather pace. Accordingly the portfolio would comprise of 3 to 4 large names with an allocation of 40 to 50  lacs.

Autos: The Indian auto industry now produces not only to meet domestic demand but also for export markets. Monthly sales figures have been moving on steadily. Despite fierce competition the current and potential growth rates in both markets could throw up interesting opportunities. A set of 2 to 3 scrips with an allocation of 18 to 26 lacs is envisaged.

IT: Once the darling of the markets the IT sector went into a prolonged valuation slump but seems to be now making a comeback. Notwithstanding tightening rules in the mother market of USA it is expected that given the cheaper sector valuations compared to the past along with the hope of increase in developed country IT spends on the back of their improving growth and the hope for a profitability boost from an entirely probable Rupee depreciation, this sector should do well. An allocation of 18 to 26 lacs spread across 2 to 3 scrips is proposed.

Portfolio Diversification: There are some sectors such as large retail & aviation which are likely to show above average growth. Pharma was an erstwhile favorite but now going through troubled times. FMCG and other consumer oriented scrips are over researched and in some cases over owned or fully priced in relation to their growth prospects. One diversified mega name is a portfolio must. Whatever the reason, reasonable diversification is a portfolio necessity and hence a sum of 40 to 50 lacs spread over 5 to 6 six scrips is suggested.

*Generally a HNI portfolio is considered to be that with a market value of Rs 1 to 5 crores.  For the purpose of this article the portfolio value is assumed to be 1.5 to 2.0 crores spread over 15 to 20 scrips. A smaller or larger portfolio value construct may be achieved by either reducing / increasing the number of scrips or allocation amounts.

The author can also be reached at 

Disclaimer:- This article is the author’s perspective on the subject matter and is not meant to be an investment advice. The author shall not be responsible for the outcome of any action purportedly initiated on the basis of this article by any reader.


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Pravin Naik
Category Shares & Stock   Report

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