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India Strategy - Markets Meter: IDFC Top Picks; 2017 ends on a high note

Indian markets: Indian markets saw new highs as political certainty ensued post state election results (Gujarat and HP). Consequently, Nifty/ BSE small cap indices rose 3%/ 5.5% in Dec 2017. Overall, 2017 has been a year of structural reforms (GST, increased focus on digitization) and fiscal stimulus (PSU banks recapitalization, Bharatmala project, etc). We believe these initiatives will address key issues (NPAs leading to weak credit offtake, weakness in SME segment and manufacturing) plaguing the Indian economy in the last few years. Though these reforms/ stimuli come associated with short-term costs (expected fiscal slippage in FY18, weaker-than-earlier-expected growth, etc.), we expect them to put India on an accelerated growth trajectory FY19 onwards. Hence, we reiterate our Mar2018 Nifty target of11300.

In light of the above positive news flows, Nifty 50 and BSE small cap grew by 29% and 60% respectively in CY2017. 2017 also saw FII net inflows of ~US$7.4bn (highest since CY14) and DII net inflows of ~US$12bn (highest so far) in Indian equities.

Global overview: In 2017, US markets touched new highs, backed by underlying strength in the economy and recent tax reforms. Also, Eurozone seems to have coped with Brexit crisis (better than UK) and surprised the markets by posting strength across economic indicators, while the economic and market performances in UK was clouded by Brexit uncertainties. We believe 2018 will also be marked by the global recovery theme, as manufacturing, investment and trade continue to grow stronger after a prolonged downturn. Hence, unless some unlikely event breaks out (like geopolitical stress worsening), we expect recovery in the global economy to continue with stronger business activity buoyed by robust demand.

Also, we believe 2018 will be marked by balance sheet tapering by major central banks, which will define the capital flows to emerging markets in the near term while the weaker emerging markets bear the brunt. Our take: India will be better positioned in this scenario.

Key themes and IDFC view: We believe two themes would predominantly play out as the economy recovers: a) Asset-heavy and export-oriented industries would do well as the global economy recovers and consequently, the valuation gap between asset-heavy and asset-light industries would narrow further, b) Consumption is the strongest component of GDP, and discretionary consumption especially continues to find growth impetus from retail credit, which we feel would continue in the near term. Moreover, recent reduction in tax rates for companies operating in the discretionary consumer sector will boost overall consumption. Consequently, we are:

Overweight: Engineering and Capital goods, Construction, Metals & Mining, Oil & Gas, Consumer Goods, Automobiles, Media and Pharmaceuticals

Neutral: Banks, Cement, Chemicals, Power and IT

Underweight: Real Estate and Telecom.

IDFC Top picks:

Large caps: SBI, ONGC, Motherson Sumi, HPCL, Hindalco Industries, Aurobindo Pharma, Bharat Electronics and Ashok Leyland

Small and mid caps: Kajaria Ceramics, SpiceJet , Ashoka Buildcon and Greenply Industries.

IDFC Top Sell:

Bajaj Auto