Quarterly Market Outlook - Kotak Securities

Domestic markets witnessed positive momentum during the month led by Moody's upgrade of India's sovereign bond ratings. Government's plan for bank recapitalization and infrastructure development under Bharatmala project also provided positive momentum to the indices. Global markets gained during the month on strong quarterly results from top companies. Some volatility was also witnessed during the month as concerns remained about whether tax reform in US could be achieved by year-end as well as negative concerns surrounding political impasse in Germany. Going ahead, the focus of the markets will be on Fed's move, development related to Brexit, snap elections in Germany as well as on the oil prices. OPEC's move to tighten global supplies may continue to keep oil prices on an uptrend. Domestically, markets are likely to focus on the outcome of Gujarat and HP elections as it is likely to test the popularity of the existing government. RBI policy is also to be watched out for; although rise in the crude prices leave very little room for RBI to cut rates further. We also expect the government to put bank recapitalization plan and infrastructure spending on the fast track going forward. Benchmark indices are currently trading at around 19x FY19 consensus estimates. Valuations continue to remain at higher levels for the domestic markets and hence we believe that earnings revival is absolutely critical for such rich valuations to sustain. We expect earnings recovery to start kicking in coming quarters with PSU bank recapitalization and Insolvency Act underway, improvement in infra capex as well as benefit of low base of earnings for H2FY18. At this juncture, our preference is for companies that have room for further expansion in valuations and improving earnings trajectory. We like stocks in infrastructure (roads and building segment focused EPC companies), Metals (aluminium players), potential healthy dividend paying cash rich PSU companies, Urban infrastructure (Smart meters and Namami Gange) and Defence (make in India). Key risks to our recommendation would come from adverse outcome of Gujarat elections, geopolitical concerns globally, decline in liquidity from FIIs and domestic mutual funds, sharp currency movements and a spike in oil prices.

Source : Equity Bulls

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