A lot hinges on earnings recovery

Year 2015 was marked with high volatility that saw foreign investors pull out money from India and other emerging markets (EMs) around the middle of the year, led by worries of a US Fed rate hike, slowing Chinese economy and a fall in crude oil prices that put stress on some sovereign wealth funds' investment capabilities. These worries have not gone off the table and could come back to haunt EMs including India, in 2016. While India is better placed given due to improving macro indicators, benign oil prices, government reforms and increasing capital expenditure, it is not immune to external shocks. Thus, experts say, investors should be stock-specific with focus on domestic themes.

The emphasis on domestic themes also stems from various measures such as power sector reforms, faster environment clearances, higher foreign direct investment limits in some sectors, and efforts to revive infrastructure projects, higher spends on roads and railways etc being undertaken by the government. The government's deal with Qatar's RasGas to bring down liquefied natural gas prices and increase offtake will benefit industries like power and fertilisers, and also ease some pressure on banks' stressed assets. The 7th pay commission will also provide a kicker to the economy next year as states hike salaries. (Click here for table)

Credit Suisse analysts led by Neelkanth Mishra wrote in a report, "Hard indicators (oil/auto demand) are improving, pointing to an economic pick-up. Next year, the downstream effects of government spending on roads/railways should show up. By June 2016, the implementation of the 7th pay commission would start an 18-month, Rs 4,50,000 crore consumption stimulus to 34 million people." The report added that housing in mainly tier-2/3 towns, and transportation should benefit and a pick-up in small-town real estate (moves around the pay commissions) should help labour demand.

While urban consumption (automobiles, food, airlines, media, telecom, consumer durables) and infra spending (EPC, road construction and railway equipment) plays are among the preferred picks, experts say select companies from global themes like pharmaceutical and information technology, which will gain from a strong dollar and a pick-up in US economic growth, should also do well.

Experts say the Reserve Bank of India's rate cuts, which haven't reflected in earnings yet, will also aid earnings recovery. "The improvement in macro-environment will start reflecting in corporate earnings which ultimately decides market movement," says Rahul Shah, vice president - equity advisory, Motilal Oswal Securities. Investors should focus on companies with good earnings growth and manageable debt, say experts.

Here are the top 10 stocks selected from the list of picks of leading research houses such as Credit Suisse, Motilal Oswal, Edelweiss, Religare Securities, ICICI Securities, Phillip Capital, Kotak Securities and Deutsche Bank. Happy investing in 2016!
Contributions from Ujjval Jauhari, Ram Prasad Sahu and Hamsini Karthik