What's in store for markets in 2016: Mr. Amit Rathi

Managing Director - AnandRathi Financial Services

Macro-view: India will remain one of the fastest growing economies amongst the large economies in the world. We expect GDP growth to be in the vicinity of 7.3-7.7% range. More importantly this growth is expected to be accompanied with moderate consumer inflation of 5-5.5% giving a nominal GDP growth of ~13%. Urban consumption and government investments would be key growth drivers. On government finances, it is our view that the fiscal deficits will remain contained to the stated target of 3.5%. The government's borrowing is expected to remain stable (or even marginally lower) at US$70-72 bn for 2016.

Interest rates: Market rates (10Y GSec yields) are likely to remain in a narrow zone and stable ~7.8-8.2%, though the policy rate stance is likely to remain soft with possibility of overall 50bps cut in 2016. This implies that the yield curve is inherently poised to become steeper with mild softening of rates on shorter duration and stable rates at higher duration zone. Thus investors in debt instruments are likely to gain only from coupon payments and very little gains are expected from capital gains.

Forex: India's trade deficit is likely to remain in the monthly average zone of about US$10bn. However, we have already outranked rest of the world in attracting FDI in 2015. We see this trend continuing in 2016 as well. On FII investments, the latter half of 2015 saw an outflow. Though we are of the opinion that this will reverse out in 2016 and hence we expect inflows from FII's. This is also supported by historic inflows being observed during the past three US rate hike cycles. On this basis it is our view that the BOP (Balance of Payments, net of capital account surplus and current account deficits) will be in the positive zone. Which in turn will give stability to INR/US$, we expect it to be in zone of Rs66-68/US$.

Equity markets: Indian markets have shown weakness specially in second half of 2015 at the back of poor earnings growth and global weakness in equity markets (with the exception of Japan and China). We began 2015 with consensus EPS outlook of Sensex for 2016 at Rs1950, which has got moderated down to Rs1640 (fall of 16% in expectations). The growth expectations for 2016 has not fallen much, it was 19% at the beginning of 2015 but has now moderated mildly to 18%. The main culprit for falling expectations was the poor performance of earnings in 2015 where we witnessed nil growth as against expectations of 16% at the beginning of 2015. The momentum for estimate revision for further downgrades remains high, thus indicating the cuts to continue in first half of 2016. In our opinion, this should bottom out in mid-2016 and would get poised for looking up towards the end of 2016. Markets are smarter than the analysts and hence we should expect equity markets to start looking up again towards the mid-2016 for a 2-3 year bull run. Moreover, headline indices (like Sensex or Nifty) are not necessarily the best indicator. In 2015, while the large-caps failed; mid-caps continued to outperform the larger peers. Sensex has lost ~7%, while mid-caps have gained ~6%. We believe 2016 will continue to reflect this trend and mid-caps will continue to outperform the large-caps. Interestingly of the 120 companies under active coverage by our research team, almost all fall into the mid-cap segment. In fact in the 1HFY16, these companies (excluding the BFSI) have shown profit growth of 30%. Majority of them have shown robust price performance as well. Clearly stock picking with good fundamentals in mid-caps will reward the investors. We remain optimistic on equity asset class as an investment opportunity. It may well be the only asset class that will beat inflation on post-tax basis in 2016. Within this asset class we see greater opportunity for mid-cap companies with good growth opportunities and strong fundamentals.

Stocks to Watch in 2016 by AnandRathi Institutional Research

We believe that 2016 belongs to infrastructure investments by government especially in the roads and power transmission segment. Hence we advise building up portfolios with road asset owners (Ashoka Buildcon), EPC companies focused on road projects (KNR Construction), and transmission asset owners as well transmission EPC companies (KEC International). Alternative energy investments is driving growth for a number of capital goods companies, hence look out for good companies which manufactures components or provides services to this segment (Sanghvi Movers). Infrastructure investments will bode well for Cement companies (Heidelberg Cement) as well as they have been having a subdued demand from housing sector till now. One must balance these high beta sector with low beta sectors like consumer (Bajaj Corp), pharmaceuticals (Suven Pharma) and technology (Persisent Systems).

Source : Equity Bulls

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