Even though 2018 is widely expected to be a better year due to fading effects of demonetisation, Goods and Services Tax and earnings recovery following the reforms and others measures taken by the government in the past few years, the risk of rising crude prices and inflation have again emerged.

This, along with 28-29 per cent jump in benchmark indices in 2017 without meaningful earnings recovery and consequently high valuations, has forced market participants to keep modest return expectations for 2018.

“An issue of worry is whether the markets have fully discounted all the India positives in advance and is going overboard on valuation just based on expected unending inflows from global/domestic sources. Investors would do well to moderate their expectations for index returns in 2018.

“We feel that investors would keep getting individual stock opportunities that could yield much higher returns,” pointed out HDFC Securities.

Arun Thukral, MD and CEO of Axis Securities has a similar view. “Given the spectacular returns in 2017, we should temper our expectations for 2018.

“Anyhow, we would advise clients to stay invested and use any meaningful correction to add good quality stocks with proven credentials to their portfolio,” he said.

With the rally across the broader market, 2018 will be a stock picker’s market rather than a top down or sectoral approach. Based on the top picks suggested by brokerages, formalisation and housing are top two themes for 2018 followed by infrastructure and auto ancillary.

Oberoi likely to lead realty

Companies such as Asian Granito India, Kajaria Ceramics, Nilkamal, Everest Industries and Century Plyboards will benefit from GST and also housing. CanFin Homes is the housing-related NBFC pick, while Oberoi Realty is the top realty pick.

The government’s focus on infrastructure will benefit companies such as Birla Corporation, L&T, NCC, Bharat Electronics, Engineers India and Ahluwalia Contracts.

Instead of automobile OEMs, brokerages are bullish on auto ancillary companies such as Endurance Technologies, Motherson Sumi Systems, Apollo Tyres, Rane Brake Lining and Ramkrishna Forgings.

Some are also bullish on India demographics-related themes such as media (Jagran Prakashan, Zee Entertainment Enterprises), aviation (InterGlobe Aviation), consumer (Godrej Agrovet, KRBL, Mirza International, Dabur India), financial services (South Indian Bank, Federal Bank, Indian Bank, SBI Life Insurance, ICICI Lombard General Insurance, Manappuram Finance, Aditya Birla Capital).

Apar Industries, Greaves Cotton, KPR Mill, RSWM, Natco Pharma, Strides Shashun, Navkar Corporation, Persistent Systems, Tata Sponge, Visaka Industries, Tech Mahindra, NHPC, Swaraj Engines and Gati are other top picks, which are estimated to have upside potential of 15-33 per cent.

The above top picks are suggested by brokerages Edelweiss, Motilal Oswal, Centrum Wealth Research, Axis Securities, HDFC Securities, Reliance Securities, Karvy and SMC.

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