Equities in 2016

It will largely be a stock-specific game

With the Fed rate hike out of the way and its future trajectory almost clear the key question is what will this hold for Indian equities in 2016. There are 4 broad trends that could help us understand how equities will perform in the next calendar year.

FII flows will be negative…

 While the first 25 bps did not have a major impact on global markets, subsequent rate hikes will start showing their impact on emerging markets. India is not likely to be any exception. During the next year, the FII flows will continue to be tepid for a variety of reasons. Firstly, with rates on an upward trajectory, the basic trade will be risk-off and not risk-on. This will imply that FIIs will prefer to sell in emerging markets and allocate money in developed markets. To a large extent, these outflows will be compensated by strong inflows from domestic institutions; especially domestic mutual funds. Nearly 50 lakh new mutual funds accounts were opened in 2015 and that trend will sustain in 2016 also.

There is a valuation question…

While Indian valuations may not be rich in terms of earnings growth, it is surely richer than other commodity driven markets which corrected sharply in the last 1 year. Even China after the stock market carnage of 2015, looks to be a more attractive valuation bet compared to India. Don’t forget, China is still growing at 6.5% despite the worst slowdown in the last 25 years.

Corporate fundamentals issue…

Most FIIs have expressed concerns over the fundamentals of the Indian economy. Fiscal deficit is likely to be impacted by higher expenditure in the next year. Corporate profits and the revival of capital cycle are still elusive. Metals companies are under stress and they are the biggest cause of NPAs in the banking system. Above all, Indian banks are sitting on stressed assets to the tune of $50 billion and that is likely to weigh on credit growth and the credit available to Indian industry. Put together, these make India’s corporate story look quite shaky.

Calibrating equities in 2016…

The Indian equity story in 2016 is likely to be built on very specific themes. Dollar defensives like IT and pharma could perform well in tune with a strong dollar, despite US market concerns. Secondly, FMCG companies with low debt levels and focused on domestic markets are likely to do well. They will ride the India consumer story effectively next year. Lastly, it will be the season of mid-caps. With focused business models and low levels of leverage, they will be perfectly poised to give above-market returns. Stock specific themes could actually be more in vogue in 2016. ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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