Here are four sectors that retail investors should approach with caution

With the budget expected to be presented in the third week of July and over two dozen IPOs hitting the market in the coming months, it is important to carefully assess the sectors that will see growth. It is equally important to identify sectors that may pose a higher risk to your capital so that you require greater caution when investing in them.

Industry experts expect MSMEs and related sectors among sectors to rebound due to possible government support in the upcoming budget. While there is a lot of enthusiasm about promising sectors including infrastructure, banking and financial services, cars, electric vehicles, etc., let’s look at sectors that should be approached with caution.

More broadly, Farooq Nabi, director and head of department at Anand Rathi Wealth Ltd, says: “Retail investors should avoid making sector-specific investments in the short term (less than a year). It may be prudent to consider flexicap and large-cap mutual fund categories using a staggered approach. If you are determined to invest in targeted investments, it is best to avoid riskier options such as PSUs and Defense.

Also read; Father’s Day: Financial investment tips for new fathers

Experts approach sectors that should be approached with caution

Space for small and medium-sized companies

Says Anand K Rathi, co-founder, MIRA Money, “Many small and mid-cap companies are experiencing significant price appreciation due to high liquidity, even if their quality is questionable. This situation is highly risky for rental investors and is not sustainable. “

Farooq Nabi offered a different perspective. Over the medium term (1-3 years), Farooq Nabi expects strong earnings growth of Nifty 50, Nifty Large Cap 100, Nifty Mid Cap 150 and Nifty Small Cap 250 in 2024-25 in the range of 11 to 22 per cent and 2025-26 . With reasonable valuations and no major froth in the market, investors can expect consistent returns, especially in the large- and small-cap segments.

“The mid-cap segment, which is showing some froth, is also expected to deliver decent returns, albeit slightly below the long-term average. It is important to remember that we are in a structural growth phase, which includes periodic corrections,” Nabi said.

Public Sector Undertakings (PSU) sector.

Investment managers are advised to approach selected PSU sectors with caution from March 2024. Since then, the PSU market has seen significant volatility, with the S&P BSE PSU Index seeing a decline of 4,000 points after the exit survey results were released. However, in several respects it has been reborn.

Anand K Rathi says, “While the government’s focus on public sector undertakings (PSUs) is leading to some recovery, not all PSUs will improve just because of the government’s commitment. Investors should be cautious if failing PSUs are highly valued.”

Many PSUs increase in value due to the belief that they will be revived, but this must be supported by solid foundations. For example, if you plan to invest in the manufacturing sector, it is important to assess whether the optimism surrounding sectors such as government- and defense-oriented PSUs has already been factored into prices. If positive expectations for the next 2-3 years are already factored into the price, a high price-to-earnings ratio could limit earnings potential even if earnings are good, Rathi said.

Says Harshad Borawake, Director, Research and Funds, Mirae Asset Investment Managers: “The value of any company is determined by fundamentals such as sustainability of growth, earnings growth, profitability, return rates, etc. In some PSUs, there may be concerns about valuation or rate of appreciation, but over time markets will value it according to its ability to generate cash.”

Rural consumption

Rural consumption is another space that retail investors should approach with caution due to scarcity of rainfall.

Rathi said, “While there are signs of improvement in rural consumption with lower interest rates and controlled inflation, the monsoon season is not as promising as expected. The current shortfall is 20 percent despite the IMD forecast of 106 percent above normal. This raises concerns about economic growth in rural areas, which is crucial for investments based on the assumption of growing consumption in rural areas. The resulting stock adjustments could be significant if rural consumption does not improve as expected.”

Urban consumption

According to Tata Mutual Fund’s June equity outlook released last week, urban consumption after growing significantly in 2022 is slowing down due to the impact of inflation and interest rates and hence the outlook is negative. The fund gave a negative outlook for the urban consumption sector.

On the negative outlook for urban consumption, Borawake said, “Since the pandemic, consumption in India has been witnessing a K-shaped recovery. Rural households and poor urban households are still recovering from the impact of the pandemic, high inflation and weak monsoons. over the last few months, rural growth in the FMCG sector has started to outpace urban growth due to the low base effect – a phenomenon that is expected to continue in FY25, but is more to do with low-level rural recovery rather than slowdown in cities.