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India Strategy: Markets Meter; IDFC Top Picks - Rural consumption outshines

Indian markets: Indian equities remained strong in July 2018 with large-cap equities outperforming small and mid-caps. However, on an absolute basis, small and mid-cap indices recovered 3% mom post 16%+ YTD decline until June  2018. Consequently, we saw a return in risk appetite with both FIIs and DIIs as net buyers at ~US$76m and ~US$615m, respectively. FIIs flows turned positive after a continued outflow for three months. However, we may not call this a trend reversal in flows yet, as outflow risk to emerging markets persists from rising global yields and looming fear of trade wars.

Q1FY19 earnings so far have progressed well on the back of low base and demand recovery. While Financials so far reported weak results, led by ageing of provisions, we observed a recovery in consumption demand. Managements across companies cited rural consumption outpacing urban in their commentaries. Also, the Indian economy is exhibiting signs of economic uptick on the micro and domestic fronts (as indicated from transactions, IIP growth on a 6mma basis, GDP/GVA growth, credit growth etc, for details please refer to our note, “”).

We maintain our FY19E Nifty target at 11550-11980 (consensus estimates at 12120-12220).

Global Overview: Post a prolonged downturn, developed economies are seeing economic recovery over last few quarters. Consequently, central banks in advanced economies are in rate hike cycle, which leading to outflows from emerging economies (as liquidity becomes scarce). This has led to emerging markets underperformance (when compared with their developed counter parts) across time frames in last six months.

However, there are concerns emerging on global growth trade wars worsening. Trade wars could lead to an uneven global growth with dampened demand. A worse case situation would be trade wars turning into currency and investment wars which would have worse impact on global growth trajectory. Consequently, global equity markets are already feeling the heat as valuations markets have corrected close long term average levels compared to peak levels earlier. Given the repercussions, we would be watch developments on trade wars cautiously.

Key themes and IDFC view: While the 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, we would pick stocks with earnings certainty as our key theme for this year. Another theme that reflects rather strongly on our scorecards is rural consumption (details ), which we believe will find support from a) government spend (as this is a pre-election year), b) Bumper crop in FY18, c) recent MSP hikes, d) expected good yield in FY19, backed by a normal monsoon.

Sector Weights: We have maintained our sector weights as follows: a) Overweight: Consumer Goods, Automobiles, Engineering and Capital goods, Construction, Metals & Mining and Media; b) Neutral: Banks, Cement, Chemicals, Power, IT, Pharmaceuticals; c) Underweight: Real Estate, Oil & Gas and Telecom.

We have not changed our top picks list for this month. IDFC Top Buys are:

Large caps: Maruti Suzuki, Coal India, NTPC, IndusInd Bank, GAIL, Hero MotoCorp, Dabur, Aurobindo Pharma

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