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BIG NEWS ON 28TH DECEMBER 2018


Posted on 28-Dec-2018 Comments  0

Macros - 2019

What are the major macro cues to watch out for in Year 2019?


The year 2019 will probably be played on the macro front. There are a number of very important cues on the domestic and global macro front. Let us look at five such cues that will matter in 2019.

General elections 2019…

The tussle looks a lot more even after the ruling NDA lost the 3 states of MP, Rajasthan and Chhattisgarh to the UPA. This is likely to have a bearing, although the markets will be indifferent to an NDA or UPA government as long as the process of economic reforms does not really get impacted. The only macro worry would be if there is an unstable third front coalition with outside support from the larger parties. That is a situation the market really would not prefer. Politics is likely to largely drive the economic outlook for the year.

Trade war outcome

The one variable India will be watching is the outcome of the trade war. The trade war between the US and China has only been suspended for 3 months. IMF has already estimated that a full-fledged trade war would wipe 40 bps from global growth. That means; India will find it really difficult to get anywhere close to 8% growth if the global macros are not supportive. A lot of Indian sectors like IT, pharma and auto ancillaries are dependent on global demand and global spending. The bet will be on a brief trade war.

Budget balancing

That will be the big challenge for the government. Post the December 11th loss to the UPA in 3 states, the NDA is likely to get aggressive on rural spend. The government has already announced a likely Rs.3 trillion package for farmer compensation and that will put a huge burden on the fisc. The fiscal deficit for the full year could shoot well above the 3.3% target putting pressure on the INR as well as the external rating of Indian sovereign debt.

Inflation and interest rates

The fiscal profligacy could lead to higher demand pull inflation. That would have a bearing on the interest rates and bond yields. RBI could cut rates in the coming year but that would be contingent on inflation staying in control. That will be a hard balancing act to do.

Crude oil and the rupee

This could be the all important variable for the Indian economy in 2019. Oil has drifted lower on global growth concerns but any demand spike during the year could result in an oil price rally. Anything above $60/bbl will spur retail inflation and also widen the trade deficit and the CAD, putting further pressure on the rupee. Reasonable crude prices will be the theme that the Indian economy will be hoping for, as that would be conducive to growth.

Sectors - 2019

What are the sectoral cues to watch out for in 2019?


We have always heard the quip that the Indian consumption story is largely intact and should drive the markets. Year 2019 could actually see the consumer sector outperforming the other sectors by a margin. Let us look at the outlook for 5 key sectors.

Consumer goods

The one theme that will continue to underpin the India story will be consumer goods. Principally, let by rising incomes and growing demand, stocks ranging from Hindustan Unilever to Havells and Hero Honda could see a sharp upturn in demand. If oil prices stay under check then we have the added advantage of lower input costs. Price inflation typically works in favor of these companies. From all angles, this looks to be the big story of 2019.

Rural themes

If farm incomes have to be doubled by 2022, then a big push to rural incomes is a must. There is already an Rs.3 trillion farmer compensation that is being worked out. NDA will not take any chances after the rural reverses in Gujarat, Karnataka and the Hindi heart-land. That means a huge spurt in demand for agro chemicals, fertilizers, hybrid seeds, FMCG products, entry level automobiles etc. This could be both the input side and the output side of rural India and could be the big sub story for the year 2019.

PSU banks and NBFCs

Believe it or not, but these stocks could be the surprise pack for 2019. PSU banks have recovered Rs.80,000 crore in 2018 and another Rs.100,000 crore will be coming back into their books in 2019. Government has promised them more capital and also greater lenience on the liquidity and the PCA front. We like the high performing PSU banks as well as the banks that are likely merger candidates as well as banks that are likely to get out of PCA. If lending starts once again, it could be an added boost for PSU banks and last mile NBFCs.

Capital goods

This is not being talked about a lot, but it could be the joker in the pack. With industrial credit back and capacity utilizations improving, capital cycle is most likely to turn around in the coming year. This may not be a sure short bet but the downside risk is limited.

IT and Pharma

This may be the two sectors to be cautious about. A trade war and an inverted US yield curve is never good news for US spending and corporate IT investments. If the dollar weakens due to a dovish view by the Fed, then the big advantage for these export sectors could go away. We suggest being a tad cautious on the export oriented space for the calendar year 2019. 

Stock Picks - 2019

What are the big stock specific ideas for the year 2019?


The big question for stock pickers is whether the year 2019 will belong to the large caps or to the mid caps. While we stay cautious on the small cap space, quality mid caps that have corrected sharply could still be in demand. Based on our sector themes, here are 5 stocks we see as outperformers for 2019.

Hindustan Unilever…

It is really hard to think of a better proxy for the Indian consumer story than HUVR. You can complain about expensive valuations but that is the way it has always been. The dual benefit of rural spending and the dividends of GST implementation should accrue to the company. The big shift towards the organized segment will also add on.

Havells…

Havells is a story largely similar to HUVR but in the consumer durables space. Like HUVR, Havells is also likely to benefit immensely from implementation of GST and the shift to organized sector. Havells will also benefit from a surge in rural and urban demand in tandem with rising income levels and rural thrust. But above all, Havells will now get the full benefit of its expansive reach across India. The recent acquisition of the white goods business of Lloyd, will give Havells a presence across the consumer durables segment that is virtually unmatched. We see Havells as a big beneficiary of the consumer thrust.

State Bank of India

To be fair, this stock has always raised high hopes for investors but failed to deliver in the last few years. Finally, SBI is likely to get its combination of an NPA bottom, credit growth and outlays in technology paying off. The stock is reasonably priced despite its size, reach and asset quality and could be the big beneficiary as the credit cycle turns around. With NCLT bonus of over Rs.1 trillion, SBI finally looks to turn around.

Dewan Housing

The crisis is gone and the result is that the stock is available at single digit valuations. Liquidity is always about perception and that has been addressed and the only challenge now is to leverage on growth segments. This may be slightly contrarian but it is a fleet footed company with high growth that is available at attractive valuations.

Larsen & Toubro

That may seem an unlikely candidate but it is the best bet on a revival in the capital cycle. With oil investments likely to go on stream next year, L&T already has a busy order book. Valuations are a lot more reasonable than what they were 6 years ago. Green shoots are indicating that the capital investments may get a boost. Buy this stock from a long term perspective only. It is not for the short term.

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