Four equity themes that will drive markets in 2017

Year 2017 promises to be a challenging year for equities. Firstly, India’s GDP growth may struggle to reach the 7% mark for the full year. That will bring a lot of old-economy company valuations into question. Secondly, US-oriented businesses will be trying to absorb the signals coming from Donald Trump on outsourcing, pharma audits and border tax. Thirdly, oil prices could finally show strength during the year and that will determine the fortunes of many Indian companies in the year. Lastly, two critical trends will drive Indian markets in the year 2017. Demonetization has set in motion the process of digitization and we will see greater convergence of payments banks, telecom companies and NBFCs. This process of digitization will be a key theme to play on in the coming year. Additionally, the passage of GST will be a major push for the coming year. Although the implementation will happen in July 2017, the impact will be felt in the coming year for sure…

Theme 1 – Don’t miss the big PSU story for 2017…

It is hard to miss the fact that most of the PSUs are quoting at near their 52-week highs. Firstly, most of the PSUs are likely to be in demand for purchase in the CPSE ETF. Secondly, key sectors where PSUs dominate like power and oil are likely to see a favourable budget this year, which is likely to favour the PSU companies. Thirdly, most of the PSUs are already attractive on dividend yield terms. When profitable PSUs are already giving dividend yield in excess of 6%, their downside risk is very limited. The government has also urged PSUs to pay out more liberal dividends to shareholders and that is also likely to favour these stocks. Fundamentally, the government could take a more aggressive stance on strategic stake sale and divestment. That could also lead to a re-rating of PSUs. This could be the one space to watch out for in 2017.

Theme 2 – The big beneficiaries of digitization…

If the early numbers on IIP are anything to go by, the impact of demonetization has not been too negative. With India embracing digital money quite aggressively, we could see demand coming back aggressively in most consumption sectors. Digitization could encompass a variety of plays here. For example, it could include companies that make software to enable digitization. It could also include companies that focus on last mile software and last mile connectivity for fulfilling transactions on the digital platform. At a simpler level digitization could also include banks and NBFCs that are likely to gain materially from their focus on digitization. The canvas will be huge but this will surely be the big theme for 2017.

Theme 3 – Watch out for the big beneficiaries of the post-GST regime…

What are the sectors that are likely to be largely impacted by the GST regime? Broadly, it will simplify tax structures and bring the entire Indian market under a single tax umbrella. This simplification will benefit companies across the board. However, there are some specific stories that may become more pronounced. Take the case of a company with a vast pan-India distribution network for its products. Currently, the entire logistics network is structured to manage the state-level taxes and levies in the most efficient manner. However, that may not be the optimal model from an efficiency point of view. GST will force companies to remodel their logistics network based on actual competitiveness and efficiency. This will open a vast business opportunity for logistics companies in India while helping companies to reduce their logistics costs in the process. GST will also reduce the tax advantage that the unorganized sector enjoys versus the organized sector. This will be a boon for companies in the paints, white goods, consumer durables, FMCG products etc where the threat of cheaper unorganized products is quite stiff. GST will give them a level playing field. These will be the stories to watch out for in 2017.

Theme 4 – Global businesses may come under protectionist pressure…

The Indian IT and pharma sector have been thriving on the back of a generously vast US market for a long time. However, the recent noises coming from Donald Trump have been quite ominous. We believe that year 2017 will see these global sectors struggling to continue to make their imprint in global markets. Trump has already spoken about a costlier visa regime, tighter immigration rules and the possibility of a border tax on jobs outsourced out of the US. All these measures could increasingly bring the Indian IT and pharma industry under the scanner. The pharma companies are already facing the heat of stringent rules like the US FDA Form 483 with respect to the manufacturing and testing facilities of Indian pharma companies. Trump has already expressed worries about the pricing policies of pharma companies, and these include Indian generic manufacturers also. That is an added worry.

The moral of the story is that year 2017 will be more about domestic plays with a larger focus on domestic consumption themes. The statements of Trump and the clamour among European nations to exit the EU have a common thread. The focus will be increasingly inward-looking and that is not good for global businesses. The year will see a distinct shift in investor preference from global dollar-defensive companies to more domestic driven stories.

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