The Indian equity market has been a story of divergences in 2019. To begin with, the benchmark indices touched new all-time highs recently, even as the economy was struggling with a real GDP figure for Q2 at a six-year low of 4.5 percent.
Within the market also, large-cap index companies are have performed well, whereas the broader market continues to struggle. Growth and quality stocks are getting an abnormally high premium, whereas the value of companies with the slightest hint of balance sheet stress is completely beaten down.
However, according to a report by Sharekhan, these anomalies will narrow down if not correct, in 2020.
"Markets are about looking ahead and not rear-view driving. The equity markets seem to be factoring in an improvement in macroeconomic conditions domestically. They are not assuming a big-bang recovery, but hoping the ‘worst is over’. In addition to accommodative monetary policy, the government is taking policy measures to address the issue through the fiscal space to do so is getting quite limited," the report stated.
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The recent surge in Indian equities has been triggered by the bold policy decision to cut corporate tax rates and aggressively pursue privatisation. The global equity rally also significantly added to improvement in sentiments and the market rally has been driven by a strong revival in foreign portfolio inflows into the country.
The global scenario seems favourable for equities, given the interest rate cuts in the US and the resumption of quantitative easing in Europe. Finally, the US and China also seem to be moving towards some kind of understanding on trade tariff-related issues, which are supporting the indices.
After the recent run-up, the benchmark indices are not cheap anymore and India trades at a substantial premium to the MSCI Emerging Market Index, the report noted. It added that consequently, there is a case for increasing allocation in quality mid-cap companies for relatively better returns in the next 12-24 months.
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"Within mid-cap stocks, certain stocks are ‘compounding stories’ that can be bought by clients with relatively lower risk appetite. Moreover, there are quality companies facing cyclical headwinds and offer scope for re-rating and substantially higher gains in the next 18-24 months though the near-term outlook remains challenging," said the report.
Thus, the brokerage suggests that these mid-cap stocks should be brought only by patient investors willing to tide through near-term volatility. Apart from this, it continues to prefer private sector corporate lending banks and select stocks in the financials, energy, specialty chemicals, consumer and industrial sectors.
The brokerage has picked up quality mid-cap to semi-largecap companies across their preferred sectors and themes, which offer favorable opportunities to invest for the next 2-3 years. Sharekhan has divided the picks under two categories namely - 'Value Picks' and 'Earnings Compounders'.
Value Picks investment basket contains stocks that are available at reasonable valuations vis-à-vis sector peers and where it expects earnings to pick in the coming years at a significant pace. However, in the near term there could be some volatility in earnings performance as these companies will pass through macro headwinds, it added.
Nevertheless, it would be best to accumulate these stocks over the next few months and every weakness would be an investment opportunity for the long term, the brokerage observed.
Here's the list of top 'value picks by Sharekhan:
The second investment basket is 'Earnings Compounders', where it has picked up companies, which are well-positioned to ride through the macro challenges and have a track record of delivering healthy earnings growth consistently over a period of time. Further, with multiple opportunities emerging in their respective segments, these companies have the balance sheet strength and market positioning to deliver industry-
leading growth rates in the next 2-3 years, it further said.
Here's the list of top 'Earnings Compounders' by Sharekhan:
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