By Vikas Agarwal, ET Bureau
The domestic stock markets have been through a spectacular rally over the last three months. The markets recorded a sharp rise in some of the most beatendown sectors during the last year.
After the formation of stable government at the centre, the first budget of the newly-elected government is to be announced in first week of July. Investors have high expectations from the first budget of this government and hence there is some very bullish undertones in the markets.
Here are some significant factors that investors should look for in a sector before choosing stocks from it:
Stocks in the auto sector have been in an uptrend during the last few months and therefore, the valuations in the auto sector stocks are no longer cheap at the current levels. Those invested in auto stocks can book some profits and hold the remaining with a tight stop-loss target.
The expected initiatives from the government for rural development could bring some positives for the auto sector in the upcoming budget. On the other hand, the rupee appreciation against the US dollar will work against the auto companies involved in exporting their variants.
Power is one of the sectors that have a huge potential to grow here. However, it requires huge investments to execute the various ongoing projects. With a stable government at the centre, more reforms and some relaxation in terms of structural issues to execute these projects are expected. Investors with a longterm horizon can accumulate stocks in the power sector at dips.
Bank stocks registered a spectacular performance in May after the election results. The new government raised the expectations on implementing banking and financial sector reforms.
The expectations from the upcoming budget include dilution of government stake in certain public sector banks, consolidation of public sector banks and a hike in the foreign direct investment (FDI) limit in the insurance sector. Given these expectations, the banking sector stocks will be in the limelight during the pre-budget season.
The stocks in FMCG segment remained out of favour in the current bull run as FMCG as a sector is considered a defensive sector, and generally, defensive sectors under-perform during a bull run. However, given the unidirectional market movement, it is better to diversify and invest a part of the portfolio in FMCG stocks as many investors in the markets are expecting a deeper correction in the short term.
The stocks in the IT sector also moved up with the markets in anticipation of a global recovery. However, investors should exercise caution in taking fresh positions in IT sector stocks.
There are many concerns that need to be addressed in the IT sector like increased competition, anti-outsourcing wave, growth in the developed economies and rupee appreciation. Analysts expect the finance minister to extend the tax benefits for the IT companies by a couple of years. This will bring some cheer to the IT counter.
Real estate and infrastructure
The real estate sector is one of the biggest gainers in the stock market bull run after the election results. The formation of a stable government has increased investor confidence in the real estate sector. However, the valuations of real estate stocks have gone up quite significantly in the last one month and investors can look at booking some profits while holding the remaining with a tight stop-loss level.
Stocks in the metals sector out-performed the broader market indices in the recent bull run. The outlook for the metals sector (especially steel) remains quite positive as analysts expect many measures from the government in the upcoming budget. Some analysts are expecting the government to impose import duty on various metals (including steel and aluminum) which would protect the domestic industry from cheap imports. Also, increased infrastructure spending is expected to provide cheer to the sector.
This is one of the fastest growing mobile phone markets in the world. Telecom companies here recorded the highest subscriber growth base anywhere in the world. The main reasons behind the growth in this market are reducing costs of ownership and increasing geographical coverage.
Investor interest in telecom stocks is due to expectations and positive signals around the auction of 3G licenses. Investors should look at investing in telecom stocks with a long-term perspective.