The year 2016 has been an interesting year for the equity market. We saw extreme pessimism at the start of the year, followed by a phenomenal market rally starting from the Budget day. In the year 2016 itself, we saw China devaluating its currency and India demonetising. Also, from Brexit to the Trump victory. All these local and global events had their impact on the markets. While looking at the year 2017, the following themes can help participants invest wisely in the capital market:
1. Have top-down approach to stock investing: On 9th November, Donald Trump got elected President of the United States and 86% or approx. Rs 15-lakh crore worth Indian currency in circulation got cancelled. Both the events had an immediate impact on the market and frontline Nifty. Indices tanked about 450 points. Many good-quality stocks got corrected by around 20%.
“The year 2015 and 2016 were phenomenal for bottom-up stock pickers, but we feel both the events mentioned above will have a significant impact on the economy as well as on markets in the short term, and therefore instead of bottom-up, top-down approach will be more appropriate while we are entering to invest in 2017 as there is market-wide correction wherein good and bad stocks have corrected decently by up to 20%-30%,” says Jimeet Modi, CEO, SAMCO Securities.
(Note: While top-down investing approach involves making investment decisions based on the overall outlook for the economy, bottom-up investing involves focusing on individual stocks based on their performance.)
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2. Sell or book profits in companies which rely heavily on crude oil: In the year 2016 crude also had made a big comeback as OPEC and non-OPEC countries agreed to cut output, and this will spoil the bull party in the year 2017, at least in a few sectors. Therefore, selling or booking partial profits in the companies which rely heavily on crude oil as a raw material is advisable as crude oil prices are expected to remain at alleviated levels in 2017. The aviation sector in particular should be avoided.
3. Keep an eye on IT, pharma stocks: In the last ten years, IT and pharma stocks had a remarkable run up, but in 2015 and predominantly in 2016, both the sectors saw heavy profit booking in the stock market. Both IT and pharma sectors should start performing in the coming year. “As and when the Trump administration propels the infra push, Indian IT companies will have new horizons to cross in terms of new opportunities in engineering and infra segments in the US. Pharma too will emerge resilient in terms of quality of manufacturing, which will henceforth be no less than world class, courtesy FDA alerts,” says Modi.
4. Road construction and cement companies may be a good bet: As the Indian government is expected to allocate large sums of money for infrastructure development, road construction and cement companies will be the biggest beneficiaries. The latest decision of paying 10% upfront in hybrid projects by the government can encourage infra players to scale up the businesses even more rapidly.
5. Investing in insurance companies to create long-term growth potential: With the listing of ICICI Prudential Life Insurance and HDFC buying the insurance business from the Max group, there is this new emerging sector – insurance in the space of financial services. India has huge potential for the insurance market. Investments in these companies would create a lot of long-term growth potential for investors.
6. CV companies may be an option: It may not be in April 2017, but sometime in 2017, GST implementation will start. Commercial vehicle companies, amongst others, will be the prime beneficiaries of GST. Demand from the logistics would be encouraging but more so due to policy decision of the government which is planning to ban commercial vehicles more than 15-year old. This decision, if implemented, would benefit CV companies in a big way as it will create a significant demand for new vehicles and will boost CV sales cycle.
7. Keep frontline PSU banks on your investment radar: The government is focusing on improving the financial health of the PSU banks with more emphasis on the frontline PSU banks. In the said pursuit, the government has reconstituted their board by professional directors as also splitting the chairmanship and executive powers of the day to day management. The implementation of the new laws in the form of bankruptcy code would help quickly recover and at the same time act as a deterrent for other defaulters. The government has put in place a new legal framework to take care of the legacy issues.
“The government has also decided to recapitalise banks to support the augmented credit delivery. The banking system presently faces the problem of more liquidity and the Reserve Bank of India is judiciously monitoring the same through CRR & MSS bonds. In view of the above, frontline PSU banks should be on the wish list of investors in 2017,” says Modi.
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8. Keep telecom stocks in mind: The year 2016 saw Reliance Industries making a foray into telecom through Reliance Jio. Once the promotional offer of Jio ends by March 2017, we can see telecom stocks performing. At present they are hammered because of the fear of Jio disrupting telecom business. “Since in 2017 and a few more years down the line, there isn’t any major capital expenditure (viz. spectrum auction) on the horizon, these companies will also preserve cash and post decent numbers,” informs Modi.
9. Avoid over exposure in any particular stock or sector: Investors should not take over exposure in any particular stock or sector through the derivative segment as it may harm their portfolio returns and their health too.
10. Trade cautiously while subscribing to IPOs: The IPO market will also be buoyant in 2017, and therefore care should be exercised in subscribing to the issues as many below-investment grade companies too will hit the market. This will lead to poor returns for investors. Therefore, investors have to remain cautious while subscribing to the IPOs.
The year 2016, thus, has been very eventful but also witnessed bumpy rides. However, by paying attention to the above-mentioned themes, one can hope to invest safely in 2017.
(Disclaimer: These investment recommendations have been made by SAMCO Securities. Although due care has been taken while making these recommendations, investors are advised to also consult their financial advisor before investing in the stock market based on these recommendations)