The markets witnessed high volatility in April 2019 due to fourth-quarter earnings season and Lok Sabha elections. A sudden spike in crude oil prices late in April also weighed on Indian shares. In May, global markets witnessed heavy selloffs after trade tensions between the US and China escalated, with Donald Trump threatening to hike import tariffs on Chinese goods worth $200 billion.
Analysts believe this volatility will continue until the election results are announced on May 23. "We remain constructive on India's overall economic growth going forward and expect broader earnings growth for the market to remain supportive. At 18.5x 1-Year forward P/E multiple for the Nifty, valuations are at a slight premium to their long-term average. However, valuations for the broader market could have the potential to offer reasonable returns for long-term investors," said Aditya Birla Capital in a report.
With the election uncertainty and worries of global growth amid escalating US-China tensions, what is working in favour of the Indian Equities? Kotak Securities answer:
- Strong macro stability evident backed by a Central Bank that is committed to keeping real rates positive.
- GDP growth is expected to stay healthy and India is likely to remain the fastest growing economy in the region.
- Improving corporate confidence and expected a revival in capex
- Strong domestic flows, currently averaging around US$1.5 billion a month, which we believe is a structural uptrend with SIP contributing almost 2/3rd of domestic flows.
- The expectation of normal monsoons and improvement in earnings
- India appears to be quite under-owned by foreign institutional investors. This should change as risk appetite returns.
However, key risks to Indian equities include the unfavourable outcome of general elections, further increase in Brent crude price leading to rupee depreciation, widening the trade deficit and waning liquidity from FIIs and domestic mutual funds, the brokerage added.
With these in mind, here are the top sectoral preferences by Kotak Securities, to invest in during elections:
According to the brokerage, investors should look at banks which bore the brunt of the latest non-performing loan cycle as they expect the credit cycle to accelerate.
Within NBFC’s, they are more selective. The balance sheets of these entities may have to shrink to accommodate more liquidity and enhance capital coverage, it said. They prefer ICICI Bank, HDFC Bank, Axis Bank, and SBI in banking space, while ICIC Prudential and SBI Life in insurance space.
As capacity utilization climbs, signs of a nascent capex cycle should emerge after elections in May, the brokerage said. Thanks to widespread government capital spending., industrials are already showing improved order books, it added. They prefer L&T, KEC, Kalpaturu Power, Sadbhav Engineering and Cochin Shipyard.
The brokerage has a positive view on GAIL and ONGC, both being beneficiaries of elevated crude prices and can act as good hedge against any spike in crude. The advise investors to avoid downstream PSUs (BPCL, HPCL and IOCL) in the near term, as current valuations ignore potential risks from any spike in crude and bleak refining outlook.
According to the brokerage, the IT sector has performed well in the past 12 months on the back of currency tailwinds and demand acceleration. Looking at the financial performance and revenue guidance of large IT companies, the brokerage believes that industry-wide acceleration in growth rates is possible in FY20.
Currency tailwinds and stable demand from the largest contributing BFSI segment is keeping the brokerage positive on IT. They are positive on HCL Tech, Infosys, L&T InfoTech, Tech Mahindra and Persistent Systems.
The brokerage believes that the sector has finally started seeing the positive news with a stable outlook in US business and strong growth in domestic business. The compliance risk is almost settled for most of the players (except DRL and Lupin) and complex and specialty approvals should add more value, it added.
"Overall, the sector should reflect better earnings growth driven by good specialty and complex approvals in the US, along with domestic market and rupee depreciation aiding the earnings. The under-ownership of the sector also should correct as we move ahead. We prefer the players focused on complex and specialty filing in US and with good domestic share," Kotak Securities said in the report.
They prefer - Sun Pharma, Divis Laboratories, Dishman Pharma and Suven Life Sciences.