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The double whammy of a falling rupee and weak stock market sentiment is keeping investors on tenterhooks. Equity benchmark Sensex declined over 250 points in intraday trade on Wednesday, looking set to extend losses for the third consecutive session, while the Indian rupee remains near its record low against the US dollar.

It is testing time for investors. Many of them see their portfolio falling by 30-40% this year so far, even though the worst in terms of stretched valuations and weak earnings appears to be behind us. It is time when investors should shift focus to long-term goals, invest with discipline and avoid aggressive bets.

The rupee's weakness has emerged as a major concern. The Indian rupee is at historic low levels against the US dollar on heavy foreign capital outflow, persisting uncertainty over an India-US trade deal, and uncertainty over global macro conditions.

On Wednesday, December 17, it plunged to the level of 91.38 before bouncing by a per cent amid reports of the Reserve Bank of India (RBI) aggressively selling dollars to support the currency.

However, the central bank cannot support the falling rupee beyond a point, and the currency will have to find its base. Experts say the currency may stabilise after an India-US trade deal is announced and foreign institutional investors (FIIs) resume buying of Indian stocks following healthy earnings trends and valuation comfort.

Normally, the rupee's weakness is positive for export-oriented sectors, such as IT and pharma.

Ross Maxwell, Global Strategy Operations Lead, VT Markets, pointed out that currency weakness often reflects global risk aversion and capital outflows, but it also creates selective opportunities. Investors should first focus on selections with a strong balance sheet, stable cash flows and reasonable valuations.

However, a sustained weakness in the domestic currency may not benefit them beyond a point, as currency weakness stops being a meaningful positive for these sectors.

"Export-oriented sectors such as IT and pharma do benefit from a weaker rupee, but beyond a certain level, the advantage fades. These companies already hedge their earnings, so incremental currency weakness doesn’t translate into proportional gains," Ajit Mishra, SVP of Research at Religare Broking, noted.

This is why there is no euphoric rally in these export-oriented stocks despite the strong fall in the rupee.

Then, what should investors do?

When the market is falling, but the medium- to long-term outlook appears bright.

Investors also must understand that this does not appear to be a market for broad sectoral bets. So, they should be selective, focus on quality names, and look for businesses where near-term risks are already priced in and medium-term earnings visibility is improving.

Nevertheless, some sectors, such as private banks, auto, cement, and NBFCs, have some attractive opportunities.

Mishra believes private banking stands out as a key opportunity.

"While there are near-term challenges such as pressure on net interest margins (NIMs), much of this is already discounted. With asset quality concerns largely behind us and the most recent quarterly earnings showing positive growth, private banks are well placed to deliver stable performance in the coming quarters," said Mishra.

From the private banking space, Mishra likes HDFC Bank and Kotak Mahindra Bank.

He is also positive about cement, as the consolidation phase in the industry appears to be behind us. Prices have also stabilised after recent hikes, and there has been no major price erosion.

"With demand holding up and likely to strengthen further, the outlook for cement remains positive. We like UltraTech Cement and Shree Cement," said Mishra.

Moreover, Mishra believes certain auto counters are benefiting from global demand and a strong product cycle.

He said the sector is attractive on a stock-specific basis rather than as a broad thematic play. He is positive on Mahindra & Mahindra and Eicher Motors.

VK Vijayakumar, Chief Investment Strategist, Geojit Investments, highlighted that there are some fundamentally strong stocks available at rational valuations at this juncture, which investors may consider accumulating at this juncture.

"Some of them include Bharti Airtel, Ashok Leyland, Mahindra & Mahindra, Maruti Suzuki, HDFC Bank and ICICI Bank. Among NBFCs, Manappuram Finance looks reasonably valued and well-positioned for strong Q3 and Q4 earnings. Pharmaceutical stocks can also be added as a defensive allocation," said Vijayakumar.

According to Maxwell, banking and financial, capital goods linked to infrastructure spending, and consumer staples remain relatively resilient during uncertain markets.

Apart from select stocks and sectors, investors must also keep their portfolios diversified with gold and silver.

"Allocations to gold should remain a vital part of the portfolio, through ETFs or sovereign gold bonds, as it will provide a hedge against currency depreciation and global uncertainty," said Maxwell.

"Investors need to focus on asset allocation, quality and long-term themes rather than short-term market noise. Investors who remain patient, diversified and selective are better positioned to navigate the market and create opportunity from the volatility," said Maxwell.

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stories by Nishant Kumar

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.

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