Key equity themes for financial year 2017-18

As the new fiscal year 2017-18 commences, the key question is what are the major equity themes to bet on? The coming year could be interesting from a domestic and global standpoint. Domestically, we will see some important state elections coming up during the year even as the RBI and the government will work hard towards a resolution of the NPA problem. Globally, it remains to be seen if Trump stands up to his promise of lower taxes and higher infrastructure spending. That will be critical to the future of IT and pharma companies. Metals will also be watching the China space and any slowdown in China will be negative for these commodities. Here are 4 key themes to bet on in the coming fiscal year as far as equity investors are concerned…

Consumption story is still intact…

Ok, the consumption did take a backseat in the light of the demonetization drive but that is history. We will start to see the impact of higher payouts under 7CPC and OROP in this year as last year the pitch was soured by demonetization. Greater rural spending will mean greater spending power and greater demand from rural and semi-urban areas. This will be positive for sectors like two-wheelers, entry-level cars and FMCG companies. Consumption may also play out indirectly through the interest in banking stocks which are again a proxy for rise in consumption. This could be the one big theme to watch out for in the coming fiscal year.

GST beneficiaries could be the other big theme for the year…

If the early indications are anything to go by, GST looks set to be implemented on July 01st as per schedule. Of course, corporate readiness may result in a slight delay but that is more of a formality. Who will be the big beneficiaries of GST in the coming fiscal? There will be two categories of companies that will benefit. Firstly, there are companies that will benefit from the efficiencies resulting from GST. One example is logistics companies. With GST, most companies will have to shift their logistics network to a need-based model rather than a tax-based model. That opens up a huge opportunity for logistics companies in the form of business prospects and consultancy revenues. Similarly, FMCG companies who pay a huge price for sub-optimal logistics will also benefit substantially from the GST.

The second category of beneficiaries will be those sectors that are currently hit by unfair competition from the unorganized sector. Specific industries like paints, electrical goods and textiles are majorly hit by the unorganised sector. The GST will bring more of these unorganized players into the tax net and give a level playing field for the organized sector. Many of these companies are already seeing a re-rating and that may become more pronounced in the coming year.

Watch out for the Mid-caps for outperformance…

In the last one year when the Nifty gave a return of over 19%, the mid cap index actually gave a return of over 30%. Many of these mid-cap companies in India are direct beneficiaries of lower oil and commodity prices. That benefit is likely to continue in the coming year. Unlike the large cap companies operating in cyclical sectors, these mid-caps operate in niche sectors where entry barriers in terms of capital are very low. This normally results in higher ROE and that too is favourable for these mid-cap companies. Lastly, these mid-cap companies are typically focused plays and are low on leverage. Either they do not require the debt or they do not have access to debt. Either ways, the low debt has come back to boost their valuations in these tough times. Mid-cap stocks in niche sectors like retailing, financial services and chemicals could be the spaces to watch out for.

Then there are the digitization stories…

The big theme of the coming year could be the digitization push. In fact, the demonetization put India inexorably on the path of digitization. There are likely to be a variety of beneficiaries of digitization. Firstly, there are companies that are likely to be direct beneficiaries of digitization of money. Companies that manufacture POS machines, that write POS software, are involved in last-mile connectivity all fall under this category. Secondly, there are the users who leverage on digitization of money to create disruptive business models to propel their business. The Kotak 811 plan for a purely digital banking experience is a case in point. Thirdly, there are segments like retail that are likely to benefit substantially from the shift to digital money as it will expand and simplify their market base with minimal administrative costs for them. These could be the key stories to watch out for.

Apart from these 4 key themes, there will be specific themes like rescue of PSU banks, global plays and emergence of insurance that could be the key driving factors for equity markets in the coming fiscal year. It surely promises to be an interesting year ahead for equities.

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

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