FY19 Nifty target lowered to 11,600; Top 5 stocks with healthy returns potential over 2-3 years

Market experts believe that the recent correction is rather an oversold one as fundamentals have not deteriorated to the extent to which prices have fallen in some stocks and sectors.

“However, we believe some time-wise corrections may still be left before we see a sustained rally. Moreover, only quality stocks may see buying as investors are likely to chase quality and good names. We have marginally changed our view on the targets for the Nifty though our lower target remains the same that is of 9,700 levels for Nifty during FY2018-19,” Ajay Jaiswal, President – Strategies & Head of Research at Stewart & Mackertich told Moneycontrol’s Sunil Shankar Matkar.

Among his top picks are Mahindra & Mahindra, Vedanta, Indian Hotels, Thermax, and Whirlpool.

The market has been range bound after correcting 10 percent from record highs. Do you believe it is oversold or is more correction on the cards? Have you changed your year-end outlook due to volatility since February? What is your overall outlook?

On the price front, we believe market is oversold as because fundamentals have not deteriorated to the extent that prices have declined for some stocks and sectors.

However, we believe some time wise corrections may still be left before we see a sustained rally. Moreover, only quality stocks may see buying as investors are likely to chase quality and good names. We have marginally changed our view on the targets for the Nifty though our lower target remains the same that is of 9700 levels for Nifty during FY2018-19.

On the Higher side we revise our targets to 11600 levels for Nifty. The reason of change is implementation of LTCG tax which may lower the pace of money flow into equity.

We remain positive on the overall outlook of the markets. We believe the structural reforms undertaken over the couple of years especially GST implementation will bear fruit soon. The virtuous cycle of higher growth will result in growth in employment, production and consumption across sectors, especially consumption.

The only risk that would restrict overshoot of our target is political uncertainty, given major states are going for polls and expectation of higher crude oil prices, though we continue our view that Brent crude may trade 72-60 for months.

What do you suggest to investors – buy on dips or sell on rally?

We suggest a buy at current levels in stocks of metals, oil marketing, consumption and auto and auto ancillaries and capital goods. For some sectors like OMC’s and IT can be accumulated on dips.

What are the biggest risks for the market on the domestic and global fronts for the next one year? Also, do you see the trade war impact getting over now for Indian market?

The biggest risk in the market from domestic front is the political risk for the next one year as major states go for polls which may also give direction to the General Elections to be held early in 2019.

However, political risks generally plays out only in the short term. The recent poor show in Gujarat and in UP and Bihar bypoll elections by the ruling government and withdrawal of support by some NDA allies has unnerved the markets. If the upcoming polls in states throw negative results, the ruling government may take measures which may not be market friendly.

Also, crude oil prices has increased in recent days and if they rise further, sentiments may be hampered. We believe the trade war may be short lived as US and China may work out a solution that may partially comfort US trade deficits. With India, US may go soft as they are likely to see us as a major business allies going forward, despite latest moves to drag India to the WTO on India subsidising exports.

Globally, central banks are hinting at hardening of interest rates. Do you expect the RBI to go for interest rate hike in the current or next year?

Rising global yields, especially in US and EU, and with expectations of higher inflation in India, it is inevitable that RBI hikes interest rates. However, it is an early call as RBI may wait till the outcome of monsoon which may be a barometer to raise rates. A better than expected monsoon may cap inflationary trends that may give RBI reason to keep interest rates unchanged.

For next year, it is too early a call as long term inflationary trends may be largely pegged at crude oil prices, which is unpredictable, though we believe crude oil prices may continue to remain range bound around current levels of $72-60/ barrel (brent) for a longer period of time.

What are your earnings expectation for Q4 and FY19? Do you think second half FY18 earnings performance will be the base for improvement in FY19 earnings?

Early indications from automobile, metals, infrastructure development gives sense of a better Q4 number. Also, some of the laggards like IT and pharma may surprise on the positive. For FY19, we expect an earnings growth between 18-20% for Nifty. We believe the first half of FY19 may be better on a lower H1FY18 base. Similarly the second Half of FY19 will be driven by more of an organic growth than just base effect.

Midcaps and smallcaps corrected steeply in the recent fall after a 50 percent rally last year. Are they now at levels that can be bought for long term or is there still room for correction?

As a general trend, the midcaps and smallcaps have corrected more than the benchmarks. We at Stewart & Mackertich see this as a healthy trend as almost every mid-small caps stocks were shooting stars which we consider as unhealthy trend. We believe quality mid-and small cap stocks may continue to see buying.

What are the five sectors that you think will do well in the medium to long term?

We believe consumption is a secular growth sector in India hence FMCG & consumer durable, Automobiles. Construction equipment, Hotels, Agro-chemicals and also metals are the top sectors that we think will do well in the medium to long term.

What are your top five picks that you believe can give healthy returns to investors over 2-3 years?

Mahindra & Mahindra, Vedanta, Indian Hotels, Thermax, Whirlpool are among the top picks of Stewart & Mackertich.