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Benchmark Nifty 50 is down 4 per cent till date in 2018 (despite today’s sharp bounce back) thanks to the recent correction on account of global and domestic factors. Experts feel that the markets will continue to remain on tenterhooks as valuations are still high and the domestic macro environment has deteriorated (higher bond yields, oil, current account deficits).
“The Nifty 50 index trades at 17.3 times and 14.5 times FY19 and FY20 estimated earnings (free-float basis). The Nifty Index trades at above its long-term average multiple despite the recent correction,” said Kotak Institutional Equities in a report.
According to Bank of America Merrill Lynch, “With valuations and earnings expectations still high, Indian equities can continue to struggle the next few months.” It has maintained its December target for the Sensex at 32,000, which implies a downside of a further 3.2 per cent from current levels.Kotak expects earnings to grow at a stronger rate of 25 per cent and 18 per cent in FY19 and FY20, respectively, led by banking, energy and commodities (read metals and mining). However, risks have emerged from acceleration of provisioning by banks and lower telecom revenues, it said. “Macro and political uncertainty remains high,” Kotak added.
Anti-incumbency blues
Results of the recent bypoll, with success to an opposition combine, suggests that the ruling BJP may have a tough task in 2019, pointed out Merrill Lynch.
In the current scenario, the best strategy would be to stick to leaders in preferred sectors, look for turnaround stories and opt for plays benefiting from global recovery, according to Kotak.
Bank of America Merrill Lynch advises investors to choose sectors such as two-wheelers, cement and staples, which are focussed on the rural economy as the government is likely to respond to any actual/perceived loss of political ground by increasing social/rural expenditure and aggregate agricultural incomes are still growing y-o-y (albeit at a slower pace than last year).
BofA-ML likes M&M, Hero MotoCorp and Hindustan Unilever. Companies such as Bajaj Corp, Colgate, Dabur, Emami, Godrej Consumer Products, Jyothy Laboratories and Marico are also rural-focussed and hence, will be other beneficiaries.
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