Markets near record high! Why investors should prioritise quality stocks and manage risks amid stretched valuations

As markets touch all-time highs, investors face the challenge of balancing risks and opportunities. While market peaks can create unease, it is essential to distinguish between record highs and fundamental overvaluation. 

Benchmark Sensex reached a record high of 85,163.23 on September 24, crossing the 85,000 mark for the first time, while Nifty set a new high of 26,011.55, breaching the 26,000 level. After hitting these milestones, the indices consolidated and ended the session flat. As of September 25, trading remains subdued, with muted movement across the markets.

Anirudh Garg, Partner and Fund Manager at Invasset PMS, advises investors to avoid rash decisions based solely on the markets' new heights. He highlights the importance of understanding the difference between market highs and genuine overvaluation when making investment choices.

The importance of quality in mid-cap and small-cap investments

When mid-cap and small-cap stocks exhibit stretched valuations, Garg recommends investors focus on high-quality companies. These firms, with strong balance sheets, consistent earnings growth, and competitive advantages, are better positioned to weather market volatility. Sectors tied to stable inflation tend to house such quality stocks, offering resilience in challenging environments.

In economies like India, where inflation is relatively stable and well-managed, investing in high-quality stocks can deliver sustainable growth. These companies are better equipped to maintain profitability in tough market conditions, making them an attractive choice for long-term growth while minimising exposure to downside risks.

Risk management and portfolio diversification

Managing risk becomes critical when markets are expensive. Garg emphasises the need for diversification and cautions against overexposure to overheated sectors. A disciplined approach to capital preservation while still seeking reasonable returns is vital. Investors should regularly reassess their portfolios, taking profits from overvalued sectors and redeploying capital into undervalued or defensive segments. Timing plays an increasingly important role in ensuring that investors do not fall victim to market corrections or overreactions.

Balancing growth and downside protection

In high-market environments, Garg suggests the strategy should focus on quality investments and robust risk management. By staying adaptable and disciplined, investors can strike a balance between capturing growth opportunities and protecting against potential downturns. Ensuring a well-rounded portfolio with a focus on quality companies helps navigate market highs while minimising exposure to risks associated with speculative or overvalued sectors.