Year 2017 is expected to be yet another one of muted gains and volatility for Indian equity markets. Based on December-end targets of 29,000 and 8,800 for the BSE S&P Sensex and Nifty 50 estimated by Deutsche Bank and UBS respectively, benchmark indices are likely to give returns in the range of 6-8 per cent. Nevertheless, this will be better than the 2-3 per cent returns eked out by benchmark indices in 2016.

Hopes of a recovery in the economy leading to better earnings growth in the second half of 2017 is the primary base for expectations of better returns vis-a-vis 2016. “An earnings growth picks up in the second half of FY18 off a low base, rate cuts (total 50 basis points) and hope of a growth recovery in 2018 may help market performance, likely more so in the second half of 2017,” said UBS in a report.

UBS remains overweight on India but believes the risk-reward ratio is not yet attractive in the near term.

Contrarian stance

While the Union Budget and implementation of GST (now likely in June-July) will be game changers, strong dollar, subdued private capex activity and outcome of State elections (especially Uttar Pradesh) are major concerns or pain points for the Indian economy.

Deutsche Bank and HDFC Securities expect FIIs to continue investing in a muted way and DIIs to carry on supporting the markets due to rising yields and rate hikes in the US, coupled with strong dollar. This will also restrict RBI’s ‘accommodative’ policy stance.

Information technology has been unanimously voted as the most preferred sector pick by three brokerages — UBS, Deutsche and HDFC Securities — due to stronger dollar stance. UBS expects dollar-rupee of 73 by FY18-end. The recent correction or underperformance of the IT index makes many stocks even more attractive.

Besides IT, pharmaceuticals, automobiles, metals, energy, utilities, infrastructure and fast-moving consumer goods (staples) will also do well in 2017.

Between large-caps and mid/small-caps, the latter is expected to do well with recovery in the economy. “Blue-chip behemoths will struggle to show decent rise. Small-caps are benefiting from very strong balance sheet restructuring, very strong earnings growth and strong revival in return ratios,” said Deepak Jasani, Head of Retail Research at HDFC Securities.

Favourites

Among the large-caps, Aurobindo Pharma, BPCL, Maruti Suzuki, NTPC, SBI, Shree Cement, Tata Motors, TCS, Tech Mahindra, Vedanta India, and YES Bank are the top picks, according to Deustche Bank.

Among the mid-caps, MOIL, GMDC, Chennai Petroleum and IOC are preferred picks of HDFC Securities, while Deutsche Bank likes CESC, Petronet LNG, Ramco Cements, RECL, Shriram Transport Finance and UPL.