Go with diversified multi-cap funds

Most of the domestic macro-economic variables have reflected an improvement over the last year, which could serve as a strong foundation for a pick-up in economic growth. To cite a few, industrial production growth has been quite strong over the last few months, commercial vehicle growth has been robust and power demand and generation have also improved.

Although headwinds on both the external and internal fronts could lead to an uneven recovery, given the cooling inflationary pressure, a pro-growth government, robust external balances and an economy relatively sheltered from a potential economic slowdown, we believe that India could still continue to be among the fastest growing economies.

The Centre has continued to show its resolve to improve long-term growth by focusing on several structural initiatives, which include infrastructure spending, ending diesel subsidies, expansion of the direct benefit transfer (DBT) programme, power sector and PSU bank reforms and higher and liberal FDI regime. Going ahead, market participants are likely to keep an eye on the reforms that aim to improve state discoms’ financial health and the developments in PSU bank reforms (formation of the bank bureau as the next step).

Reasonable valuations

Corporate earnings downgrades could continue for some time. However, given the base effect and indications of economic recovery, the pace of these downgrades could be relatively lower.

Moreover, corporate earnings growth has borne the brunt of the overall slowdown in commodity prices. While there have been interest rate cuts by the RBI (to the tune of 125 bps in CY2015), the effect of these rate cuts is yet to be seen.

With the evolution of lending rate calculation, the economy, and subsequently, corporates, are likely to benefit from lower interest rates. Also, the base effect could lead to better year-on-year corporate performance in the second half of fiscal 2016 and hence pick-up in earnings growth may be visible from FY17.

Further, the corporate profit cycle is close to all-time lows and hence the valuations appear reasonable at the current stage.

The current market valuations are close to the historical long-term averages. Further, the valuation gap between mid-caps and large-caps is almost closed now, though there are pockets of over-valuation. Hence, along with the valuations, it is pertinent to focus on stocks with visibility of earnings growth and strong managements. Therefore, at this juncture, we recommend investors to consider diversified multi-cap funds for systematic investments in order to participate in the equity markets.