Sensex above 40,000; where to invest now?

When the Sensex touched the 40,000 mark for the third time during the year, the big question was what next? On the last two occasions, the markets had dipped sharply after touching that level. However, this time there are a number of factors that have come together to make this rally more sustainable.

Why this time Sensex could rally beyond 40,000?

There are, in fact, a number of reasons why the Sensex could convincingly rally beyond the 40,000 mark this time around. Let us look at some of these key drivers for the market.

• The classic budget blunders have all been done away with. So the public shareholding hike is shelved and capital gains on equities have been kept out of the higher surcharge. That should keep the FPIs happy.

• The clarification on the buyback tax applicability has also given some room for hope, although the markets will still like the tax to be abolished in totality.

• The tax cut from 30% to 22%, giving a total payout reduction of 9.77%, will be the real big bang for the markets as it adds nearly $20 billion to the bottom lines.

• The concessional tax of 15% on new manufacturing investments will also be a boost for companies to revive the capital cycle in a big way.

• The latest quarter results have indicated that while slowdown may have hit the top lines, the profits are still being sustained through better product positioning and cost cuts.

• BREXIT looks like getting resolved and the US-China trade war is abating. Global risk may not be gone, but it is surely looking a lot more sober.

• The A/D (Advance/Decline) ratio is gradually looking up and that is an indication of the broadening of the market rally and that is normally more sustainable.

• Finally, there is the next big bang if the government abolishes the DDT and revamps the LTCG taxes. A small shift here could have a multiplier impact on market sentiments.

Logic accepted, but where to invest now?

That is the million dollar question. Even assuming that the market does have steam left, where can one invest without taking on too much of valuation risks? Here are five investment ideas at this market level.

1. Like it or not, consumption still remains the big theme. If the tax reforms come through then the big push could come from the consumption story. That includes FMCG, private banks and a part of two wheelers too. It may be too early to become positive on the auto stocks as they still need the financial taps to flow. Consumption stocks have also used this opportunity to reposition products and cut costs. Weak oil is an advantage.

2. It may be too early to talk about a revival of the capital cycle but the impact of the 15% concessional tax is currently being underestimated. India has been talking about weak capital cycle for over 7 years now but finally, there is a favorable tax policy to encourage capital investments. Over the next few months we will see a lot more companies opting for lower taxes and for tax concessions on capital investments.

3. The PSU story appears quite attractive in the current scenario. PSU banks are likely to benefit from the bottoming of the NPA cycle. In addition, PSUs in areas like mining, oil and even metals may be serious candidates for divestment, strategic sale or even total privatization. That could be a big trigger even at these levels.

4. Look for laggard surprises like telecom and power. That may not look like a great investment idea but here is the logic. Between them,  power and telecom companies owe close to $100 billion to the Indian banks. There is no way the government is going to allow these two sectors to fail. There could be a new telecom and also a new power policy that could rethink the way these sectors operate in India. Watch out, they could be the surprise package.

5. Finally, don’t ignore the mid cap stories; you can look at small caps at a later date. Focus on sound model mid caps where the correction has been more in sympathy.  Focus on stable business models, low levels of debt and good standards of corporate governance. If these three conditions are satisfied, you can seriously look at such mid cap stocks.

The moral of the story is that there are a plenty of opportunities in this market irrespective of the levels of the Sensex. That is what you need to look out for!