Positive returns in New Samvat, stick to quality scrips

Policy, monetary triggers, reasonable valuations and likely reversal in earnings cycle could turn the year ahead robust for the market

After staying flat for a major part of the year since Diwali last year, the Sensex has given 10% returns. A large part of this has come post the reforms push in September 2012. In the short term, the Street will keep an eye out for global developments (US fiscal front, Eurozone), the winter session of Parliament and the last Budget before the General Elections in the country.

While there are a number of challenges on the policy front in India and global risks, experts are upbeat about their outlook for the markets over the next year as fundamentals are looking better, valuations are reasonable and the earnings cycle is turning. “Over the next 12-18 months we could see a bull market. During this period we are looking for a Sensex target of about 23,000,” says Saurabh Mukherjea, head of equities, Ambit Capital. The Sensex is currently at 18,650 levels, about 19% short of that target.

In addition to keeping high quality stocks with balance sheet strength and revenue visibility, experts advise investors with a higher risk appetite can selectively go for good names in high beta sectors (capital goods, infrastructure, banking), turnaround plays and quality small/midcaps due to the valuation gap vis-à-vis large caps. Some of the key names include ICICI Bank, Maruti Suzuki and Bharti Airtel. For a list of top picks from top brokerages, see table.

Reasonably valued

Though the markets have gone up, the current valuations at about 15 times one-year forward earnings is viewed reasonable and is close to historical long-term average. Moreover, since the earnings cycle is seen reversing, the risk-to-reward ratio is considered to be favourable.

Additionally, liquidity can provide huge support given the easy monetary policies of the developed world.
On the domestic front as well, the continuity of reforms and government’s efforts to revive the economy is seen in positive vein. Steps like implementation of GST, curtailing fiscal deficit through PSU disinvestments and reduction in subsidy bill could boost market sentiments. Further, rate cuts by the RBI and support provided by leading indicators like recovery in the purchasing power index and easing inflation could be key catalysts for extension of rally.

Intermediate hurdles 

However, the experts also believe that the next leg of market rally may not be as easy. “The fiscal cliff in US is expected to be the first big test for global equities. EU chiefs will also have to keep on working hard to avoid catastrophes. And more importantly, the Indian policy-makers will face a big test in the ensuing winter session. The last budget before 2014 elections will also be important," says Dipen Shah, Head- Private Client Group Research, Kotak Securities. While selecting individual stocks they advise caution and advocate that investors opt for high quality stocks, which have visibility and balance sheet strength.

Diwali crackers

Over the next one year, experts are expecting at least 75-100 basis point cut in interest rates, which is also a reason that they include the names from the high beta sectors like capital goods, infrastructure, banking and some individual companies with the high sensitivity to rate cut as their top picks.

There is one more space where the investors could focus on and that is turnaround plays given that many companies are undergoing the restructuring exercise and looking to monetise assets or ease liquidity through steps like FCCB restructuring. “We recommend a few turnaround stories that are otherwise structurally strong businesses and available cheap at this point, such as Crompton Greaves in the capital goods space,” says Angel Broking’s CMD Dinesh Thakkar.

During the last downturn, the mid and small cap companies suffered both in terms of fundamentals and perception. This is also a reason that the valuation gap between the two has widened. “We could see during the bull market over the next six months the mid and small cap outperforming. And as the economy recovers and the earnings improve the valuations gap between the mid cap and large cap too will ease leading to higher gains,” says Ambit’s Mukherjea.