Capital Allocation Key To Success When Market At All-Time High!

Capital Allocation Key To Success When Market At All-Time High!

Capital allocation when the equity market is at its life highs can be a strategic decision that may decide how fast your money grows. Asset allocation, we all understand, is the key to wealth creation in the long run. What should be your capital allocation strategy when the equity market is at all-time high? Yogesh Supekar with the help of sectoral trends provides direction on the optimal capital allocation decisions.

With markets at all-time highs the most intriguing question that majority of investors have in their minds is whether the rally is going to continue or is the trend going to reverse from the top? Most importantly, investors must decide if it is worth taking some money off the table or should one deploy more cash into the equity markets at this juncture? Says Abhay Kulkarni who has been an active investor in the markets: “I started investing aggressively in the equity markets late last year i.e. 2020 because I sensed that the equity markets will outperform. I switched or reallocated some of my long-term portfolio money from fixed income securities and gold to equity.” 

“I was proven right because gold prices fell and I made more money in equity than I would have made in fixed income investment. In hindsight it was a masterstroke. Now I am faced with a similar dilemma. As markets have gone up so high so fast, I am wondering if I should take money off the table from the equity markets and park again in a fixed income portfolio and even gold for that matter. While I am a long-term investor, the current level in the markets is what is making me think of reallocation. But then I don’t want to be in a situation where I sell my quality stocks only because the market is at all-time highs and then repent my decision if the market heads higher,” he adds.

“I am a little confused right now. Also, what about the fresh investible money that I have? Should I deploy it at these levels? Or should I wait for a market dip? Will the dip come? When will the market correct and how much? As I don’t have answers to these questions, I am not able to enter the market confidently at this point of time,” he concludes. Investing at all-time high is unnerving a lot of investors as the lure of extra returns remains irresistible but clearly the risks are visible as we are at the top. The best way to approach this situation is to identify the triggers that are driving the markets.

Following aspects should be considered while investing at all time highs:

1. Find out what institutional investors are doing. Institutional investors are buying even at the current levels. There is no shortage of money flow into mutual funds by investors in India and the SIP mode of investing is getting more and more popular as we speak. The SIP money is stickier in nature and augurs well for the markets. It is always helpful to find out quality stocks that institutional investors are buying. The quality stocks where the institutional holding QoQ is increasing can be considered positive. That said, the rising power of retail investors cannot be ignored; hence if there is institutional selling, it does not mean that the stock will fall for sure.

2. Earnings growth highlighted by revenue growth is what is supporting the markets right now. Whether to allocate fresh money in equity market should be driven by the conviction on earnings growth. If you are confident on the earnings growth going forward, invest in equity. Wherever the earnings’ growth seems patchy, avoid investing. Overall, the trend in earnings growth is healthy and as we move into a festive season the demand scenario promises to be fruitful for corporate India. Q2FY22 is expected to meet market estimates.

3. Liquidity can be a function of multiple factors including interest rates. RBI’s policy stance has been supportive of markets and does not look like we will have an increase in interest rates any time soon. The liquidity is here to stay in the market and one can expect more liquidity to pump into equity as the earnings scenario strengthens further.

4. On the macroeconomic indicators front, with the inflation figures in control, positive exports data, industrial production on rise, privatisation in full swing and GDP growth well on track we can say that Indian economy is doing relatively much better than most of its peers. Such outstanding macroeconomic performance is catching global investors’ attention and hence we can expect money flow into the Indian equity markets to continue, thus pushing markets higher. According to Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, “India’s Industrial Production (IIP) expanded by 11.9 per cent YoY in Aug 2021 with a gradual revival in industrial activity.

“However, the momentum of such revival has clearly dropped as evident from the slight sequential contraction in the index vis-à-vis the strong uptick seen in the months of June-July after the peak of the pandemic’s second wave. On the user-based side, broad-based expansion was recorded with primary, capital, intermediate and infrastructure registering double-digit annualised growth. Encouragingly, consumer non-durables have seen a growth YoY versus a contraction last month, raising hopes for a recovery in rural demand. The sequential growth in infrastructure index also indicates the positive effects of higher capital expenditure by the government.”

5. The global market outlook is steady with the US markets taking the lead. The rally in US markets is no more restricted to the FAANG stocks and is broad-based. The earnings’ season in US markets is already hinting at extremely strong earnings season for the markets. The liquidity is here to stay, and the sentiment is cautiously optimistic on equity as an asset class. One of the major reasons why the performance of global equity as an asset class stands out is the lacklustre performance of the other asset classes.

With the positive triggers in place, it is likely that the equity markets will gain strength from the current levels. For markets to correct substantially the earnings disappointment will play a crucial role. There is no substantial leverage in the system as of now and hence it will be difficult for the market to free fall or crash, the way we saw in 2008 or even in the pandemic led correction. Investing at all-time highs is all about research, stocking with quality stocks and betting on the right sector. A quality growth company will always outperform in the long run no matter where the frontline index is headed. Sectoral allocation is the key when the market is at all-time high. Capital is allocated to equity markets when records are being broken; it is important that the money is invested in sectors where the growth prospects are optimal. Which sectors should be preferred at this juncture when the markets are at all-time highs?

Information Technology (IT)

Is the best behind us when it comes to IT stocks? IT stocks have had a dream run outperforming the trending markets in the past 18 months or so. The raging debate facing investors is whether the IT sector can continue its dream run on the bourses. The results (Q2FY22) so far suggest that the IT sector may continue to deliver earnings growth and the strong management commentary on the FY22E guidance suggests that all is not over with IT stocks. The better-than-expected performance of Wipro, Infosys and Mindtree in Q2FY22 has energised the bulls. The strong outlook and positive management guidance by the large IT companies is something that investors can take comfort from. The major concern facing IT companies is on the margin front and the attrition rate. The table below highlights the margin trend for the IT companies: 

According to HDFC Securities, if one studies Wipro results for Q2FY22 the following highlights emerge: Revenue growth of 6.9 per cent QoQ (estimate of +5.5 per cent QoQ) was at the higher end of the guided range. IT services’ EBIT margin stood at 17.8 per cent (-126 bps QoQ, estimate of 18.5 per cent), impacted by two months of wage increase for senior executives and rising attrition. Growth was led by BFSI/ communication/consumer/technology verticals. Offshoring stood at 55.6 per cent (+160 bps QoQ), utilisation stood at 89.2 per cent (+240 bps QoQ) and attrition increased to 20.5 per cent (+500 bps QoQ).

This highlight suggests that the offshoring growth trend may continue while the margin pressure will remain. BFSI segment is one of the major growth contributors. One of the major debates within the IT sector remains whetherthe mid-cap IT stocks are better prospects or the large-cap IT stocks are better placed to outperform. One can immediately notice that the mid-cap IT stocks have been outperforming the large-cap peers both in terms of earnings growth and on the bourses.The mid-cap IT stocks are more focused while the large-cap IT stocks are more diversified and generate revenues from various clients across the sectors.

The mid-cap IT stocks are dependent on one or two sectors such as BFSI segment for growth. There are a few mid-cap IT stocks like Birlasoft that are big on the manufacturing sector. The point is that mid-cap IT stocks are less diversified than their large-cap IT peers and hence should be included in the portfolio only after thorough due diligence. Investors betting on mid-cap IT stocks may see better returns but will be undertaking higher risk as well. On a risk adjusted basis the large-cap IT stocks offer better risk adjusted returns for investors in the long term. Multiple triggers are at play for the IT sector such as the strong deal momentum, broad-based adoption of digital formation and shift to cloud and accelerated hiring. Betting on the Indian IT sector is not only betting on the Indian economy exports but also on cutting-edge technology providers that are making big on the global technology landscape. Investors can allocate capital to the IT sector even if the valuations look steep. A staggered investing approach is recommended for this sector.

Pradeep Gupta,
Co-Founder and Vice Chairman, Anand Rathi Group

With the markets at all-time high which sectors should be focused on by investors in your view?

From the March 2020 bottom, small-caps have rallied over 225 per cent, mid-cap 170 per cent and large-cap 130 per cent. I expect the outlook for the Indian equity market for the next financial year to be positive. There has been a significant improvement in the macroeconomic environment in the country with major bounce-back in manufacturing, utilities, infrastructure activities and select segments of the services sector. From a 12-month perspective, one can look at increasing allocation in large-cap and reducing in small-cap. From sector perspective we like the investment theme over consumption for a 24–36-month perspective, specifically sectors like construction, real estate, cement, metals and financials.

Which sector in your view will surprise positively on the earnings front?

Macroeconomic policies in India are clearly focusing on stimulating growth through the investment route. Budgetary support to the public sector unit for capital spending has also been enhanced. Under the production linked incentive (PLI) scheme, the government would provide large monetary support to the corporate sector to undertake investment in certain areas including specialty chemicals, pharmaceuticals, to name a few. The government has also made the necessary changes to attract more foreign funding. In view of all these, I would expect the investment theme to play out favourably in the Indian equity market during the next year. Sectors which are likely to outperform include financials, construction and pharmaceuticals. I believe that these may provide positive earnings surprise.

What should be the capital allocation strategy now that the markets are almost at all-time highs?

I believe that asset allocation is the most important investment decision. Investors should consider three major aspects before making any financial decision, which is risk taking ability, time horizon of the portfolio and return expectations. This does not and should not depend on the phase of market and business cycle. If, due to the strong run-up in the equity market, the equity allocation has gone up substantially over the planned allocation then one can look at their re-balancing strategy. On the other hand, if the actual allocation is lower than desired, then one should increase it irrespective of the near-term market expectations.

Equity as an asset class is volatile in the short term; therefore, possibility of a 5-10 per cent market correction in the shortterm cannot be ruled out. At the same time, continued rally in the equity market is also a distinct possibility and timing the market accurately is not possible. The consistent and less risky way to make significant portfolio return is, therefore, to remain invested in the market and not to get unnerved by the possible or actual corrections in the equity market. Patience and sticking to well-desired asset allocation strategy are the two most important ingredients in the making of a successful investor. The prevailing market conditions should not influence these decisions. 

"Upbeat Guidance and Weak Rupee Augurs Wells for the IT Sector"

Oil and Gas

It is not only the Tata Group stocks that are getting rerated but several stocks from the oil and gas sector also are seen gaining traction. The positive trigger for the oil and gas sector is the rising domestic gas supply and improvement in oil and gas realisation. This rise in prices is expected to drive earnings growth and valuation of upstream companies such as ONGC. The APM gas price is expected to be revised upwards by over 60 per cent to ~USD 3 per mmbtu in H2FY22. The positive triggers for the sector may push the quality stocks higher and hence the opportunities in the sector should not be ignored.

There is a strong execution pick up in the capital goods sector and the industrials. A broad-based recovery is seen in the sector and is expected to be reflected in Q2FY22. A substantial improvement in labour availability and timely customer collections may lead to positive momentum in the execution. The supply chain issues are also getting solved and may act as a positive trigger for the sector.

FMCG and Alcohol Beverage :

With resilient demand the FMCG sector and the alcohol and beverage sector is expected to be on investors’ radar. The FMCG sector and the alcohol industry can be expected to deliver strong performance in Q2FY22 owing to improved consumer sentiment along with improved mobility during the quarter. The improvement in rural demand is one of the major triggers for the sector. Investors can explore opportunities in the alcohol beverage space and select FMCG stocks for outperformance without being worried about the market being at all-time highs and excessive valuations. The recent outperformance in ITC suggests improving prospects for the FMCG stocks.

Banks and Financials

The achievement of Sensex and Nifty has surprised many investors. The stellar performance of the index would not have been possible without the contribution of banks. The improving prospects of private banks and PSU banks augur well for long-term investors willing to invest in equity markets. It is expected that the collection efficiencies in Q1FY22 will continue and the trend of healthy recovery for most lenders in disbursements will be witnessed. The trend of high slippages may continue. The collection efficiencies have reached the pre-pandemic levels for most banks and the same may be reflected in the quarterly results.


Any decision about capital allocation when the market is at an all-time high is always a difficult one to make. However, with the markets being at all-time high currently is just one of the several factors that investors need to take into consideration while making investments. The focus should be on earnings’ growth and quality of earnings because the growth in earnings across key sectors is what will determine the strength of the markets.At the current levels the market is discounting or pricing in several negatives such as rise in inflation levels, prospects of tapering and thus rising interest rates, high commodity prices impacting the profit margins, supply chain shocks and rising corona virus cases suggesting an emergence of third wave. What the market at its current price has not discounted is earnings’ disappointment.

The market is strong because the abundant liquidity has found a perfect ally in the form of earnings’ growth. With the business environment improving as reflected in the management commentary of FY22E earnings guidance, there is scope for rerating of stocks from several sectors. Recently we saw Tata Group shares being rerated. Energy stocks have been flying through the roof. Commodity stocks after cooling off from their respective all-time highs are starting to gain their mojo back. IT stocks after a brief period of consolidation are once again a darling of long-term investors. Banks and financials are recovering along with the retailers. The positive momentum in industrials and building materials cannot be ignored even as cement stocks and real estate stocks are getting difficult to resist.

This broad-based movement in shares across the sectors reflects the strength of the market. Yes, with the market at all-time high and valuations no more attractive there is a reason to be cautious on the markets; however, the positive triggers are outweighing the negative ones as of now. It is time to remain invested in the equity markets and stick to a long-term investment allocation strategy. Instead of taking money of the table the right thing to do can be to identify the next set of stocks that can outperform. There is a sectoral rotation happening and one sector gains momentum after another. One must identify the sectors that can outperform and the probability of winning in the market can increase.

The growth in revenue (ex-financials and OMCs) is likely to drive earnings in the coming quarters. Even though there are concerns on the operating margin front owing to the surge in input costs, the growth in volume is expected to negate the impact of rising costs. The financials are expected to report expansion in the NIIs. The cement sector outlook remains strong with South-based cement companies expected to declare higher PAT growth owing to steep rise in cement prices recently. The consumer staples and consumer discretionary sector is steady, supported by rise in rural demand.

The building material industry is witnessing healthy traction. The upbeat guidance and weak rupee augurs well for the IT sector. Investors can look at allocating fresh monies in these sectors with a long-term view. Investing at all-time high means one must be little extra cautious. However, being cautious should not be tantamount to selling equity and holding cash or any other asset class. Investing at all-time high also means that the margin of error is very thin and hence only quality stocks with earnings visibility should be preferred. The risk component definitely increases when the market is at all-time highs like it is today; however, the risks can be substantially mitigated if the capital allocation is done across sectors with positive triggers in place. 

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