Year 2018 could be a stock-picker’s dream

As the year 2017 comes to an end, the big question is what will the year 2018 bring. Here are six themes to watch out for in the next year which could have larger implications for the Indian capital markets.

The interest rate downcycle, which started in January 2015, may be about to end in the coming year. With the US Federal Reserve likely to hike rates in three, or possibly four, tranches, the Reserve Bank of India (RBI) may not be too keen to consider rate cuts in 2018. At least, the sharply rising 10-year bond yields in India appear to indicate so. Inflation is already above RBI comfort level of 4% and with crude oil around $67/barrel, inflation is likely to remain at elevated levels. The year 2018 would probably mean an end to the rate-cut cycle with an outside possibility of even a brief rate hike by the RBI.

The second big trend in 2018 could be a quicker resolution to the bank NPA crisis. The RBI itself has mentioned in its latest policy that the NPA cycle of PSU banks may be bottoming out. We can expect more aggressive push towards a resolution of indebted companies, cleaning up of balance sheets, restructuring of company ownership and management, etc. All this could be positive for the banking sector in particular and the equity markets in general.

Rural could be the big theme for 2018 as farmer distress and indebtedness appear to be big challenges for the government right now. The Gujarat election results appear to hint at rural disenchantment and the government will be keen to correct that. This rural thrust could have larger positive implications for specific sectors like tractors, fertilisers, agri-chemicals, drip irrigation providers, hybrid seed companies etc.

The way the geopolitical situation is shaping up; there are multiple power centres emerging. China is flexing its muscles and that could continue in 2018. By voting against the US motion in the UN General Assembly, the Indian government will look to de-risk its defence dependence from global players. That means; 2018 will see a revival of the 'Make in India' theme, especially with respect to the defence sector.

Midcap companies could continue to dominate the overall markets as had been the case in the last three years. Quality mid-cap companies with focused business models, low leverage and lesser vulnerability to interest rate shifts will be better placed in the coming year. Also with a big focus on rural and defence in 2018, there will be a plethora of subsidiary and downstream benefits trickling down for mid-cap companies. The major outperformers will continue to come from the mid-cap space in the year 2018.

Retail flows into equities are likely to continue. With a robust IPO market and most equity funds outperforming the indices, Indian retail investors may have tasted success in equity mutual fund SIPs. Having realised the relative safety and long-term wealth creation potential of systematic investment plans (SIPs), retail flows into equity funds are not going to reduce in a hurry. 2018 will be an affirmation of sustained retail flows into equity SIPs.

The index level of the Nifty and the Sensex may not hold too much relevance in 2018. With corporate earnings and GDP growth likely to pick up gradually, the Nifty and Sensex may still face valuation concerns. The real action will be stock-specific. The new year could be a stock-picker’s dream.

WHAT CAN CLICK IN THE NEW YEAR

• Rural could be the big theme for 2018 as farmer distress and indebtedness appear to be big challenges for the government right now
   
• The new year will see a revival of the 'Make in India' theme, especially with respect to the defence sector
   
• Midcap companies could continue to dominate the overall markets as had been the case in the last three years
   
• Having tasted success in systematic investment plans, retail flows into equity funds are not going to reduce in a hurry

The writer is a fund manager with Angel Broking Pvt Ltd