Rational approach to investment opportunities amid market euphoria

While stock prices of many companies have rallied in the last few years, the fundamentals still lag. Though, the 10-year returns of the index have turned around registering 14.07%, this is not a bad performance considering the Sensex returns of 14.34% as of January-end

Undoubtedly, we’re in a bull market, it’s at these times we’ve to multiply our vigilance over our asset allocation at first and thetype of risks we’re exposed. Unknowingly, we tend to explore some of the investment opportunities which we otherwise shun. It could be because of the outperformance of our existing portfolio or the fear-of-missing-out (FOMO) due to the continued media hype.

The noise could easily distort our judgment as we get carried away with the euphoria created around particular stock(s) or sector(s). Traditionally, you may have avoided or not invested in these as you didn’t find their fundamentals right or didn’t fit your risk profile. Even worse is that you’re completely unaware i.e., not understood their businesses or management.

This is also the period when you see new funds or opportunities being launched on these themes or sectors. Take for instance, the craze around PSU (Public Sector Units) stocks. These are the listed shares of the companies where the central government is the majority ie, 51 per cent or more stakeholders. Of course, they’ve had a brilliant run in the last three years delivering over 45 per cent during the said period. Now, there’re a slew of funds or index/ETF (Exchanged Traded Funds) being launched around this theme.

Historically, these stockswere mostly ignored by the active or passive fund managers as these have been weak on their fundamentals. Especially their inefficient operations, lack of competitive environment and unproductive workforce has hampered their grown over the decades. Since the opening of the economy in ’91, they were the target of divestment by the govt. The realisation of the government that they should concentrate on governance and not be in business has led to successive govts using dis-investment to either move out or reduce their stake, albeit with partial success.

The current government, particularly, post-covid has embarked on self-sufficiency and realised that these companies have capacities to execute their larger goals. Also, the government’s push to perk up manufacturing industry has resulted in huge public (government) capex (capital expenditure). The evolving geo-political situation also aided this initiative along with changing work culture and active management by the largest stakeholder, the govt.

One could see this transformation bearing fruit with the overall PAT (Profit-After-Tax) of the PSU index constituents registering a growth of about 61 per cent during 2021-2023, resulting in generating returns of over 45 per cent. This contrasts with a negative 4.2 per cent (-4.2 per cent) since 2014-20 period, with returns of the index at a meagre 2.9 per cent. So, ideally, someone who have entered these stocks or the index in ’22 would’ve captured these stellar returns.

The S&P BSE PSU Index constitutes 57 stocks across sectors, with the largest sector comprising weightage of about a quarter (25.11 per cent) of the index while the top ten stocks represent more than half (55 per cent) of the overall index. Banking occupies the largest weight followed by Oil at 15 per cent, Insurance at 13.5 per cent, Power about 13 per cent, and Non-Banking Finance at over 8.5 per cent. These five sectors cover about three-fourths of the weight of the index per the latest market capitalisation.

While stock prices of many companies have rallied in the last few years, the fundamentals still lag. Though, the 10-year returns of the index have turned around registering 14.07 per cent, this is not a bad performance considering the Sensex returns of 14.34 per cent as of January-end. But it could turn unpalatable if one were to begin the investment especially expecting a similar return. Moreover, if we were to read between the lines, the govt’s intention is to get a better price for their disinvestment process, which remained under-par in their own targets.

I’m not suggesting that these investments would backfire, but it must be approached with rationality and better expectations considering the realities. If one were to keenly observe any good performing flexi-cap mutual fund (MF), one would find most of these preforming stocks in their portfolio. Moreover, pursuing any thematic or sectoral funds/index requires a bit of timing too and can’t be left unattended like any flexi-cap fund. So, for those investors whose risk appetite is moderate or low could avoid exposures to these investments.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])