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India Strategy: Markets Meter; IDFC Top Picks - Prefer earnings growth stories

Indian markets: Indian Large cap equities outperformed small caps in last six months, as investors looked for a safe haven in blue chips. This move has been led primarily by FII outflows from India (along with other emerging markets on account of rising global yields and looming fear of trade wars). Consequently, Nifty 50 is up 2.3% CYTD18 while BSE small cap index is down 16% during the same time.

While the Indian economy is exhibiting signs of economic uptick on micro and domestic front (as indicated from transactions, IIP growth on a 6mma basis, GDP/GVA growth, credit growth etc ), we are observing threats on the external front (led by stronger crude, FII outflows, etc - for details please refer to our note, “What’s moving on the ground”). We thus expect stocks with higher earnings growth and certainty in earnings growth trajectory to outperform markets as against those with poor earnings performance, which we believe would de-rate (details in our note on “Playing Gems and Riding Horses”).

Our FY19 Nifty target range is 11550-11980 (consensus expectations at 12120-12220).

Global Overview: As bond yields of major economies have hardened, most emerging economies have underperformed developed economies across time frames in last six months. However, with news flows on trade wars worsening, equities in developed economies have been under pressure over last one month. This has caused valuations across markets to slide to average bands compared to peak multiples earlier.

On the brighter side, developed economies are seeing earnings growth along with strength in other economic fundamentals over last few quarters, post prolonged downturn. Although the growth has given the central banks a chance to increase rates, but if trade wars worsen or turn into investment wars, we could see serious repercussions for global growth (which had just gained momentum in last few quarters). We would be watch developments on trade wars cautiously.

Key themes and IDFC view: While economy continues to gather steam on the domestic/micro front, challenges on the external front pose a threat in the near term. We believe stocks that do not perform on earnings delivery will derate, while those with earnings certainty will continue to do well. Hence, stocks with earnings certainty would be our key theme for this year. Another theme that reflects rather strongly on our scorecards is rural consumption (details here), which we believe will find support from a) government spend (as this is a pre-election year), b) Bumper crop in FY18, c) expected good yield in FY19 backed by a normal monsoon.

Sector Weights: In light of recent strength in crude prices and OMC’s difficult position in passing the price increase to consumers (given it’s a pre-election year), we reduce our weight on Oil & Gas space to underweight from overweight earlier. We are currently: Overweight: Consumer Goods, Automobiles, Engineering and Capital goods, Construction, Metals & Mining, Media and Pharmaceuticals; Neutral: Banks, Cement, Chemicals, Power and IT; Underweight: Real Estate, Oil & Gas and Telecom.

IDFC Top Buys: Large caps: Maruti Suzuki, Coal India, NTPC, IndusInd Bank, GAIL, Hero MotoCorp, Dubur

 Small and mid caps: Bharat Electronics, AIA Engineering, India Energy Exchange