From PSU banks to NBFCs, a look at the sectors that could hog the limelight during the year
Investing could be a tricky thing when you find yourself in the middle of a strong bull market. The S&P BSE Sensex, which rose nearly 10 percent so far in 2017 and nearly 15 percent in the last year, could find itself stuck at higher levels.
For the market to move higher from current levels would require some positive triggers such as earnings recovery, stable global environment as well commodity prices. But, analysts are hopeful that the bull market argument still remains intact for Indian markets.
“While the market may have run ahead of time, ahead of earnings growth, ahead of economic recovery, the broader market still trades at about 17-18 times which is reasonable, if not steep,” Dhiraj Sachdev, senior VP at HSBC Global AMC told CNBC-TV18.
He is optimistic that this could be Bull Market 2.0, which is probably going to be maybe better than we saw in 2003 to 2007 and in 12-18 months from now, we may be better than we are today, says Sachdev.
On a global level, India's performance is disproportionately driven by P/E changes and currency and less by a rise in forward earnings per share (EPS). The sectors which are likely to remain in focus include names like metals, IT, PSU banks, NBFC’s, energy, pharma as well as metal stocks.
“The broader Indian market is now in its fourth consecutive month of outperformance compared to global equities in USD terms. On a YTD basis, it has outperformed by 15%, reversing the Nov/Dec-16 decline,” Credit Suisse said in a report.
“Our preferred sectors, i.e. Metals, IT, Industrials, Utilities, and Energy have lagged in P/E increase but have all seen increases in forward EPS, which we believe should drive sustained outperformance going forward,” it said.
Going by the buzz on D-Street, we have collated a list of top five sectors which will hog the limelight in 2017:
'Monster Rally' in PSU banks
PSU banks which recorded a great run so far in the year 2017 and have rallied up to 85 percent in the last one year may witness a monster rally as the risk reward equation is still favourable, suggest experts.
The sector is going through massive consolidation and the introduction of revised Prompt Corrective Action guidelines from RBI also fuelled confidence.
“We are looking at a monster rally in some of the PSU banks in the weeks and months to come. The kind of setups that we have in some of the smaller names, I would like to believe that many of these names can actually move up two or three times from current levels and a lot of the midsized names can give 40-50 percent upside over the next six-nine months,” Gautam Shah, Associate Director & Technical Analyst at JM Financial told CNBC-TV18 in an interview.
“In a normal scenario we would like to believe that PSU banks will be the star performer. We are extremely bullish there and investors should look out for sizeable returns there. PSU banks give slightly better risk-reward because after the kind of correction that the Nifty has seen in the last one week,” he said.
Buy metal stocks on corrections
Most of the metal stocks listed in the S&P BSE Metal index outperformed the S&P BSE Sensex in the last one year apart from Welspun Corp, Coal India, and Orissa Mineral Development Company.
In the last six months, metal has been one of the best performer in the marketplace but came under pressure in the last seven-ten trading sessions. But, are still good stocks to buy on dips.
“We are of the view that metal rally is likely to continue the whole of 2017. The setup is still as good as one can get and the small corrections of 3-4 percent, which keep happening from time to time, they just make the setup very healthy,” said Shah of JM Financial.
“From a risk-to-reward perspective this looks like a good opportunity to get into metals, keeping in mind that the last ten days have been corrective for them,” he said.
Power sector could be the dark horse
Power sector could be the dark horse and is currently placed at the start of a major rally, suggest experts. Most of the power stocks gave handsome returns to investors in the last one year such as CESC (76%), Power Grid (44%), Crompton Greaves (44%), and GMR Infra (33%).
Metal stocks started to do well after underperforming for two-and-a-half years, oil and gas as an index made a strong comeback after underperforming for five years, power has made a comeback.
“Power sector could potentially be a dark horse for 2017. This index is coming back after seven years of underperformance and in the last one month itself a lot of these power stocks are up anywhere between 15 percent and 20 percent and this is just a start of a major rally,” said Shah of JM Financial.
“We expect a lot of these power stocks to move up 40-50 percent in value in 2017. It is good to see that a lot of these underperforming stocks come back and it actually makes the bull market a little stronger because you do not want the same set of stocks leading the market higher,” he said.
Opportunity size is significant in Pharma sector
Pharma stocks have been under pressure in the last 12-18 months on rising concerns of regulatory hurdles from USFDA as well as rising rupee.
Manish Gunwani, Deputy CIO, Equity at ICICI Prudential Mutual Fund in an interview with CNBC-TV18 said that his fund is overweight on pharma sector on the back of wearing off of US drug regulator’s issues over the next couple of years. The opportunity size is significant.
“In the next couple of years, a lot of these Food and Drug Administration (FDA) related issues should wear off. From a top-down perspective, in terms of India's competitive advantages, it is a sector that suits that profile very well,” he said.
“We have very high-quality managements, high-quality companies and the opportunity size is quite significant, not only in the US generic space but with the global pharmaceutical space overall,” added Gunwani.
NBFCs has a lot of room to grow
Investors should watch out for NBFCs which should now come back to normalcy in operations after demonetisation.
“I think NBFCs will stand out because you might see post demonetisation period at least the AUM of the NBFCs or financial services companies will be better or come back to normalcy,” Dhiraj Sachdev of HSBC Global AMC said in an interview with CNBC-TV18.
“We believe the NBFC space or the private banks will probably stand out compared to the others. They will have some kind of NIM expansion because of wholesale borrowing cost or lower bond yields and as well as asset quality will be stable for several housing finance companies,” he said.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.