Budget 2018: 5 midcaps on radar as govt focuses on easing pain in farm and rural sector

Rise in domestic and global liquidity led to P/E re-rating in the market. Do you think the story will reverse in 2018 or will the rally continue? What is the Nifty target for next year?

   

The rally has been largely driven by expansion in P/E multiples with earnings growth faltering due to adverse impact of demonetistion and implementation of GST. Going ahead, we see limited scope for multiple expansion from here and the baton to take markets ahead would have to be passed on to earnings growth in 2018.

Consequently, we expect the benchmark indices to largely move in line with expected growth of 12-15 percent in earnings of index companies in the next fiscal.

What will be the big drivers for Indian markets in 2018?

In addition to continued strong domestic inflows in financial assets (including equities), we believe that improving growth of global economy (aided by expected uptick in US economy) would boost global trade and improve fortunes of export-focused businesses in general. Second, the clean-up and recapitalisation of public sector banks and its positive impact on overall earnings growth would be among the key drivers of equities in 2018.

How important are the recent state election results ahead of the general elections in 2019?

State elections have gained more importance lately as it provides an indication of the mood of the voters post the bold reforms undertaken by the government that has impacted the lives of the common man.

Though the intentions are right and the voters understand it in general, market participants will keenly watch if it will give the opposition a fair chance to stage a strong comeback.

Any unfavourable verdict could impact the government’s ability to take tough policy decisions during the remainder of its term in office.

As we are near the year-end and no major events are lined up, the next key events are earnings and the Budget. What are your expectations from the last full-fledged budget of the Modi government?

One does not expect any bold policy measures in the next Budget. Given the nascent stage of recovery from the twin effect of demonetisation and GST, the government focus would be on easing the pain in the farming and rural sector and continue with public spending on infra development to support the economy.

Anyway, post GST, a large part of the decision on indirect taxation need not be taken in the Union Budget now.

Midcaps outperformed the Sensex in 2017. Do you think will it continue to outperform in 2018?

Midcaps are a very broad space and there always would be money-making opportunities in the midcap segment. Rather than focusing on midcap index, the approach should be to focus on sustainable growth stories within the midcap space.

Apart from crude, what are the biggest risks for the Indian markets in 2018?

Cheap money globally is fueling an unsustainable rally in several assets. Bitcoin is a case in point. Such bubbles tend to grow big enough to impact other asset classes in case of a burst or accidents.

In India, a lot of hope is pinned on fast recovery in the economy and revival of earnings growth over the next few quarters. Any negative surprises on these two fronts could seriously impact the markets.

As we move to 2018, what are your five best multibagger ideas for 2018?

Rather than dabble in unknown, high risk smallcap stocks in search of exponential returns, we see growing maturity among investors to look for investment themes with multi-year growth outlook.

Three such trends are: Financialisation (shift of household savings to financial assets from physical assets), Formalisation (market share gains by organised players in fragmented industries as the unorganised players lose the advantage of nonpayment of taxes) and rural consumption (driven by the government focus to double farm income).

Based on these investment themes we like following companies: Bajaj Finserv, Parag Milk, Varun Beverages, Jubilant Foodworks and PNB Housing.