Diversify across sectors to balance portfolio: HDFC Life

On the defensive side, we prefer pharma over the consumer stocks.

Prasun Gajri

CIO

HDFC Life

"Once that happens maybe we will get the next leg up purely because of money flowing in. But on a fundamental basis, we believe it's pretty much a range bound market for the time being," he said.

Gajri suggested a mix of defensive and beta stocks while building one's portfolio. While he prefers pharma shares to consumer stocks among the defensive plays, he said that it's a more bottom-up stock picking strategy, and that one should diversify across sectors to balance the portfolio.

Below is the edited transcript of Gajri's interview with CNBC-TV18.

Q: How are you looking at the market for the moment? Do you think we are pretty much capped on the upside?

A: Yes, I would agree that we are in a range bound market. It's not something where you would want to really claim that we are into some bull run or anything. We have been in a range bound market for a while. I think that is going to continue. Both the global and domestic cues on the poor economic data front are not looking very great.

So I guess the next trigger, which could come in the short run, is any monetary action from the central banks across the world. Once that happens maybe we will get the next leg up purely because of money flowing in. But on a fundamental basis, we believe it's pretty much a range bound market for the time being.

Q: Where exactly would you would be able to park some money at this point in time?

A: When you are building a portfolio, you can't really focus on one sector. If I were to really look at building a portfolio today, I would make it a mix of defensive and beta stocks because you can't be completely defensive. The problem today is that whatever you believe is doing well and the earnings are kind of holding up is very expensive. So you really don't want to be entirely in those sectors or those companies.

At the same time, there are a lot of stocks, which are extremely cheap, but maybe they are under the weather for a while. So I guess you have to build a mix of both. On the defensive side, we prefer pharma over the consumer stocks clearly. I believe the valuations and growth are still better off and most of the pharma companies have pretty much delivered in this quarter. So there is focus on the defensives. We will continue to be invested in select consumer stocks as well where we have co-holdings, we are not really exiting those.

But we are not really adding too much to that area given the valuation issues. Also the fact that the discretionary consumption space is definitely starting to get hurt is evident from this quarter's results. On the other sectors, one has to be selective. It's no longer a sector specific kind of an investment. I think it has become very, very stock specific. It's a more bottom-up stock picking, and by and large, one should diversify across sectors to balance the portfolio.

Q: What will be the touchstones when you pick up stocks?

A: I don't think that ever changes. We are looking at two or three things. One is obviously reasonable RoEs. From a 12-18 months perspective, it makes sense to accumulate companies whose balance sheets are not under too much of stress, who don't require too much external capital to be raised given the situation, and at the same time, the valuations have corrected to levels.

Q: If you have the elbowroom, how much would you put in fixed income and how much you put in equities as of now? At HDFC Life, how far do you think this downturn can go on?

A: In terms of asset allocation, I think it's a good time to really stick to your long-term asset allocation. While the fixed income side looks quite interesting, you don't expect the interest rates to fall significantly from these levels given the fiscal challenges we have in the country.

So by and large, at best, you are going to make what the current Yield to maturity (YTM) is. So you end up making maybe 8.5-9% on fixed income. Given that, I don't think fixed income is making much sense to be extremely overweight. So I think equity allocations for us wherever we have a discretion to allocate the equity, we would be at least neutral if not overweight.