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India Strategy: Markets Meter; IDFC Top Picks

Indian markets: Indian equities are seeing volatile times clouded by domestic as well as global events. In addition to concerns over 2019 general election results, brewing trouble between the US and China over trade talks too have kept markets on edge. We believe markets will revert to macroeconomic and company performance related fundamentals once these events play out by next month. Fundamentally speaking, Q4FY19 earnings season has been a mixed bag with consumption slowdown getting extended to staples, although banks have begun to recover from the prolonged NPA-related pain. Concerns around domestic growth have deepened over past few months and we believe a policy direction from central government would be key, as it would guide capital allocation and investment decisions over the near to medium term. Global growth has also come off and continues to face event-based risks. Slowing growth concerns are expected to push RBI, Fed and ECB to pursue dovish policy tactics, keeping markets aflush with easy money. Hence, we expect valuation multiples to remain relaxed, as fundamentals drive performance. 

With the recent correction (3.3% in last one week), Nifty 12-month forward PE has reverted close to its long-term average and +1 standard deviation (SD) band. While expectations of abundant liquidity ease our concerns on valuations, we believe extended growth slowdown could pose a formidable challenge to the performance of India equities in CY19. We would keep a keen eye on policy direction by the new government and the economic performance.

Global Overview: Global economy is seeing interesting times as populism and protectionism have led to a growth slowdown while inflation is still low and economies are far from overheating (detailed note ). Consequently, growth challenges in the global economy are event based –outcome of US-China trade talks and Brexit in particular. With IMF downgrading global growth expectations in the near past and bond markets experiencing growth scare, global central banks continue to make statements that they will ensure their support for pro-growth stance as inflation remains low. Consequently, we expect a dovish stance by central banks in CY19, which may extend to CY20 in case of adverse outcome on US-China trade talks and Brexit.

Key themes and IDFC view: India’s growth story has hit a soft patch, led by weak consumption metrics. In the meanwhile, NPA resolution is lending strength to corporate credit off-take, which we believe will support investment-related themes in the near term. The biggest challenge to investment in the economy may emerge from fiscal irresponsibility, which could result in crowding out of bond markets and pose a threat to this theme. However, in light of near-term weakness in consumption metrics and strength in corporate credit metrics, we downgrade Autos to Neutral (from Overweight) and upgrade Cement to Overweight (from Neutral earlier). We will closely watch for policy actions of the new government, as that would direct capital allocation and investment-related decisions in the near term and will define our sector allocations post-election results.

Sector Weights: IDFC sector weights: a) OW: Banks, Consumer Goods, Cement, Engineering and Capital Goods, Construction and Media; b) Neutral: Automobiles, Chemicals, IT, Metals & Mining, Power, Pharmaceuticals; c) Underweight: Real Estate, Oil & Gas and Telecom.

IDFC Top Buys:

Large caps: ICICI Bank, ACC, L&T, Aurobindo Pharma

Small and mid caps: Aarti Industries, KEC International, Indian Energy Exchange (IEX), NCC