Update- 

As warned in the post, we eventually had an almost 500 point Nifty correction in September to 9700. I called a technical bottom to the correction at 9700 and re-initiated several long positions in the next few days. Since then markets have resumed their prior uptrend.

 

Even fundamental view is somewhat improving with strong global growth and it now seems that the GST disruption is also largely behind us. Even recent auto sales, export IIP data also indicate that we should see growth pickup form q2 onward.Most of the early quarterly results have also been encouraging among the stocks I hold.

Original Unedited Post-

I first posted of my target of 11000 on Nifty in March 2015 when the index was around 7400.  Now after the dream rally since then with the Nifty up 33% in 17 months & 22% YTD, I believe  it is good time to review past investments, book profits in stocks showing irrational exuberance, look to exit laggards that never lived up to their potential and wait for market corrections to provide fresh buying opportunities.

For better part of 2015-16 I was steadily increasing my equity allocation, but now I feel the time is to do the reverse. If Feb & Dec 2016 was the time to show bravado and invest fearlessly, this is the time to be cautious. Over the past few months I have been net seller and have steadily increased cash levels. If markets continue to march ahead I will to strive towards a more concentrated portfolio of lesser stocks, preferring companies with established business models and track record of profitability instead of those just selling future dreams. Currently my stock exits are more and bigger than fresh entries and most of my recent purchases have been in small sizes compared to the overall portfolio.Even short term trading buys are very small as my focus now shifts to capital preservation.

Taking a technical view of the Nifty chart, the Nifty index is near the upper end of the 8 year up-channel making the risk/reward very unfavorable. On weekly setup, the MACD indicator has given a bearish crossover. Even the ADX indicator, which measure the strength of the trend has started falling from recent highs indicating that the best of gains may be behind us for near term.

nifty final

Even looking at fundamentals, earnings growth continue to  remain a disappointment at index level first due to demonetization and then due to GST transition and sector specific struggles in IT & Pharma. The Nifty has crossed a trailing P/E of 25 times in last few weeks. Although most TV experts continue to remain optimistic that earnings will recover just 1-2 quarters down the line, but haven’t we been hearing the same for last 3 years?

I was expecting better growth myself which has not materialized hence I have changed my stance to cautious. According to me this can be a very bad time to invest based on marketing gimmicks with celeb advisers selling dreams of Nifty at 15000-20000 to gullible retail investors. It may even take 5-7 years for Nifty to get to 20000 and it sure won’t be a straight line rally. Wild market swings are a reality that any long term investor must embrace and learn to profit from with experience.

Now taking stock of various sectors, the BankNifty index hit a high of 25199 in August which is under 4% of my target of 26000. The big contributors have been Yes, Indisind, Kotak and HDFCbank which have kept their NPAs under control and continue to deliver steady earnings growth. Other index components are trading significantly below their respective all time highs. Hence we have the dilemma that performing stocks have become expensive and the seemingly cheaper ones may continue to struggle with NPA woes for still many quarters to come.

Similarly FMCG sector has become expensive with the average trailing P/E of the stocks that I track in this sector has touched 50 causing me to completely exit couple of our large holdings. 50-60X trailing P/E is a good time to book profits when even in  best case growth is unlikely to exceed 15-20%.

Autos continue to show mixed moves with likes of Ashok Leyland, Motherson Sumi, Bharat Forge, Maruti, Eicher  & HeroMotoCo doing well since I discussed this sector, boosted by good sales or earnings with valuations being slightly out of my comfort zone but still not too expensive. Others like SML, Tata Motors, Bajaj etc are currently going through a lean patch plagued by company specific issues.

I’ve added a bit to my tech holdings in recent months but allocation to sector remains at about 10% down from peak of around 20% in 2014 as I don’t expect any miracles and still don’t own any of the Big 4.

Pharma has been a massive underperformer for me in last 1 year with most of our holdings falling sharply led by poor earnings and dwindling of future prospects.Currently my pharma portfolio is trading sub-20X of my pessimistic FY19 earnings estimates. So hopefully we are near the bottom now and we may get reasons to buy more in this sector in coming months as companies sort out their regulatory issues, start getting new drug approvals and price wars in older products come to an end.

Even on macro front we have seen lots of bad news this week. The fiscal deficit of the govt has already reached 92% of FY18 targets in just 4 months. The GDP growth rate has slowed down further to 5.7% for Q1FY18.  With RBI releasing data showing 99%  of demonetized notes coming back and the whole exercise costing massively with little gains leading to a fall in the RBI’s surplus for FY17  causing a steep fall in dividend paid by it to the govt having huge fiscal impact.

In the end let’s just hope and pray that the long promised miracle recovery and Acche Din finally arrive and deliver earnings recovery to justify current expensive stock valuations.

Disclaimer- Views biased. This does not constitute investment advice. Read full disclaimer here.