Market behavior is very strange since Jan 2018. If one looks at Sensex and nifty the returns are positive and this will make us think that market is at worst sideways or not as great as it was last year. But the moment we look at broader market (Small cap and mid cap index), things completely change. They have already witnessed market crash and are down significantly.
Mid cap is down by -15% and small cap down by -21% this year which is very high. Worse still the pain is not over yet and we may expect some more fall before rally resumes. This is how mid and small cap perform and have been performing all throughout but the surprising part is the performance of sensex and nifty which has almost isolated itself from such crash. To clear your confusion, I will like to remind you that mid and small cap index had a steller run all throughout 2017 and were highly overvalued in Jan 2018. Even after this steep fall it’s not fairly valued yet. While there are counter views where one says that fall may ultimately extend to Sensex as well while the other view says mid/small cap should recover from here (with earnings revival) along with Sensex which should reach it’s all time high.
This article is not intended to do an in-depth analysis of market outlook but to design a portfolio which performs well in bear market condition with minimum risk and decent returns. This portfolio will still outperform if the markets turn bullish.
We have made some adjustment in our algorithm for bear markets and made it more biased towards risk minimization within acceptable minimum return. It is designed to deliver 2.5 times of sensex return with 1/4th of it’s risk on monthly basis although this cannot be guaranteed.
Algorithm has considered below parameters to identify
- Fundamentall strength
- Price momentum
- Risk (Volatility)
- Bear beta
- Performance of sector
We have not considered any technical parameter.
|stock||Performance score||CMP on 30th June|
|Britannia Industries Ltd.||51||6240|
|Tata Consultancy Services Ltd.||49||1845|
|Hindustan Unilever Ltd.||42||1636|
|Nestle India Ltd.||37||9810|
|HDFC Bank Ltd.||29||2111|
|Bajaj Finance Ltd.||23||2299|
|Kotak Mahindra Bank Ltd.||23||1344|
|Jubilant Foodworks Ltd.||20||1395|
|Larsen & Toubro Infotech Ltd.||11||1665|
Pfizer, Zydus wellness, Mahindra n Mahindra and dabur are few honourable mentions. A high performance score is more indicative of lower risk than higher returns. It also means that the stock is less likely to be replaced in next review after 2 weeks. We have given very high weightage to risk but we have also not ignored returns. This is the reason why stocks like gellitte, Polaris, Power grid, ITC could not qualify despite being very safe. At the same time HEG, Graphite india, IB ventures, Merck etc also could not qualify due to high risk (volatility) associated with them.
This portfolio is not risk free but the risk associated is much lower as compared to market. Stocks need to be revisited every biweekly and 1 or 2 stock will get replaced with new one so as to keep the returns at 2.5 times of sensex. We will do a performance check of the portfolio after 30 days. Please do your own research or consult your financial advisor before investing.