How retail investors can make the most of current bull run

In the past three months the BSE sensex has jumped over 3000 points, about 8.85%.

Why markets are high?

“The current market rally can be attributed to hope of truce between the US and China on trade war front and resurgence of FII flows into emerging markets and India. The Adjusted Net Profit of Nifty-50 companies that have come out with results till 4 November has gone up by 17%. Earnings growth has been far better in Q2-FY20 than what we have seen in past many quarters. The advantage of reduced tax rate (on a yoy basis) could continue till end of FY20 which means we can expect better earnings in Q3 & Q4 of FY20 also," says Rusmik Oza, Head of Fundamental Research, Kotak Securities.

Corroborating his views, Prateek Pant, co-founder and head of products and solutions at Sanctum Wealth said, “The market sentiment is positive right now and there are multiple factors contributing to the sentiment. The trigger was the corporate tax cut announced by Finance Minister and start of government’s long list of reforms to revive the economy, uptick in PAT numbers visible in initial companies declaring September quarter earnings and increased FII inflows are driving the current rally."

What retail investors should do?

Retail investors can benefit in the current market rally by diversifying and reallocating their investment portfolios. Experts suggest that retail investors should hold on to mid & small caps and look to reduce exposure in certain large caps that have moved up disproportionately and have turned extremely rich in terms of valuations.

“Most quality stocks (paying full tax rate) have rallied by 15-20% after the announcement of tax rate cut thereby capturing the positives likely to come from this factor. Nifty-50 has also rallied from 10,650 to more than 11,900 mainly on the back of earnings leg-up coming from cut in tax rate and positive FII flows. The forward PE of Nifty-50 based on Bloomberg consensus estimates has moved up to 18.2x and is very close to its previous two peaks of ~19x. This leaves very less room for any re-rating or near-term upside in the Nifty-50. However, the same cannot be said for broader mid and small caps which are trading at fair or attractive valuations because of their steep price erosion," explains Oza.

Buy low sell high?

Buy low and sell high is one of the most common advice touted as the key for good investments. However, it is not as simple as it sounds.

“In the current rally, retail investors can actually benefit by staying invested, and diversifying their portfolios. While the Sensex has gone up, the breath has been quite negative giving an opportunity to the retail investors to buy new stocks," says Pant.

“Buy low and sell high is more relevant in cyclical stocks or B2B kind of companies. It is less relevant in consumer-facing B2C companies that are long term wealth generators. However, in today’s scenario most of the consumer facing companies are trading at either peak or very rich valuations. Hence, it would make sense to reduce exposure in some of the very richly valued companies and move into good companies from other sectors which are trading at lower end of their valuation band," says Oza.

BSE Sensex on Thursday opened at fresh record high, while Nifty topped the 12,000 mark as investors cheered the government's ₹25,000 crore booster to revive the realty sector.