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The equity market had an outstanding year in 2017. Benchmark Index Nifty 50 gave a return of nearly 28% (till date), while the Nifty Midcap 100 and Nifty small cap 100 outperformed with returns of 44% and 50%, respectively.
This is a great achievement, given that they were in the backdrop of two major reforms -- Demonetisation and GST -- which had impacted the economy as well as the market. Despite several geopolitical issues, global markets too climbed to their record highs.
The government continued its focus on reforms like GST, IBC, RERA, infrastructure development, Direct Benefit Transfer, Housing for All, PSU Bank recapitalisation plan, etc. during 2017, which were well received by the market. Strong liquidity, both from domestic as well as international investors were also supportive throughout 2017.
On the macro front â€“ GDP growth was seen slowing mid-way through the year (5.7% in Q1FY18), but witnessed some recovery later (6.3% in Q2FY18). Corporate earnings growth was still elusive, even as there were some signs of improvement in the Q2FY18 results. H2FY18 is likely to see better growth on the back of healthy demand during festival season.
In a major boost to the government reform process, international rating agency â€“ Moody's upgraded India's sovereign credit rating to Baa2 from Baa3 after a period of 14 years (last in January 2004) citing continuous improvement in economy and fiscal metrics. The rating agency has forecast India's GDP growth at 6.7% in FY18 and 7.5% in FY19.
The Union Budget for 2017-18 witnessed many changes. The 92-year-old Railway Budget was merged with the Union Budget, classification of plan and non-plan expenditure was done away with, and the budget was advanced to February 1 rather than the customary last working day of February.
There were seven state elections during 2017, including key states like UP and Gujarat. BJP (the ruling party at the Centre) formed the government in six of these states. This was seen as a positive development for the equity market, as a sign of political stability and continuity of reforms process.
The year 2017 was a landmark year for IPOs. More than 150 public offerings came to the market and together raised nearly $11.5 billion. The year also saw equity issuances of companies from several new sectors, such as life insurance, general insurance, AMCs and new-age small finance banks. The outperforming sectors during 2017 were consumer durables, real estate, metals, telecom and BFSI, while the ones which under-performed were Pharma and IT. Going ahead, equity market is expected to continue to deliver consistent returns in 2018 driven by stronger economic growth and recovery in corporate earnings. However, the scale of returns expected would be in the range of 10-15% owing to a high base and normalisation of valuations playing out in 2018. Our year-end target for Nifty is about 11,450-11,650.
Some of the themes that we believe should do well in 2018 are:
n Cyclicals like cement, infrastructure and capital goods, which are expected to benefit from higher government spending. Some top picks would be L&T, Sadbhav Engineering, KNR Construction, UltraTech, JK Cement.
n GST beneficiaries like jewellery retail, footwear and building material are expected to benefit from the value migration from unorganised to organised players. Here the selection would be stocks like Titan, PC Jeweller, Havells, Pidilite and Nilkamal .
n Rural recovery sectors like auto, FMCG, vehicle financing, etc. Top picks are Maruti, M&M, Dabur, Britannia, M&M Financial Services, Shriram Transport Finance.
(The writer is Head- Retail Research, Motilal Oswal Group)