Moneycontrol
Jan 10, 2018 12:30 PM IST | Source: Moneycontrol.com

2017-like rally unlikely, but can expect 12-15% returns this year; 5 themes key in 2018

12-15% returns possible if earnings show 10/19 percent growth in FY18/19 and GDP grows more than 7 percent in next few quarters, said Mahesh Patil of Aditya Birla Sun Life AMC

The market gave a big surprise to investors in 2017 as the 50-share NSE Nifty shot up 29 percent, which was largely in line with global trend, but it was despite growth slowdown due to twin disruptions — demonetisation and GST implementation.

The stupendous rally was driven not only by liquidity, but also by hope of earnings and economic recovery (due to reforms by Modi government) going ahead, which had been lagging for many quarters in the past.

That kind of returns seem unlikely in 2018 though earnings and economic recovery look possible, is the word coming from Aditya Birla Capital.

What it expects is 12-15 percent return in the current year and the similar kind of uptrend is likely to continue in 2019 & 2020 as well.

But is it really achievable? Yes, it is largely possible if earnings show 10/19 percent growth in FY18/19 and GDP grows more than 7 percent in next few quarters, Mahesh Patil, Co-Chief Investment Officer of Aditya Birla Sun Life AMC said on the sidelines of Aditya Birla Capital conference on Tuesday.

These are not the only assumptions for double digit returns for 2018. The research house expects crude oil to trade in range of USD 55-65 a barrel, global growth to continue, reforms (GST, IBC, RERA, road projects worth Rs 7 lakh crore, Rs 2.11 lakh crore PSU banks' recapitalisation, affordable housing, etc) announced in last two years to show results and rural growth which was lagging to be seen going ahead, which will create conducive growth environment for the country.

"Modi government's five reforms would see the results starting 2018 putting India in a 'Stronger for longer' position," Patil said.

He further said the higher ranking in 'ease of doing business' and Moody's India upgrade also gave strong confidence to investors.

Last year, global rating agency Moody's after raising India's rating by a notch to Baa2 (after 13 years) had said reforms implemented to date would advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth.

The reform program would thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness, it added.

Other positives that Aditya Birla Capital pointed out are consumption growth (due to low interest rates, 7th pay commission, lower GST rates, farm loan waiver, recovery in rural) is expected to drive GDP; likely pick up in private capex; likely long term liquidity support to market on the downside; stability in inflation; comfortable current account deficit (led by foreign flows & forex reserves); and stability in rupee (around 61-66 to US dollar).

The investment firm expects India to remain an investment destination for foreigners due to growth opportunities it provides at the back of strong economy and currency.

Mutual fund industry, which has seen average monthly inflow run rate of Rs 19,000 crore in 2017, is expected to see at least Rs 10,000 crore monthly inflow in current year, the firm said.

It also believes the NSE Nifty which rallied 29 percent on hopes of recovery is not in a bubble territory and will look cheaper as earnings recover going ahead. In fact, the Nifty has merit in trading at premium valuations compared to historical averages and also 2008 peak, it said.

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"Considering other parameters like P/B, P/S, dividend yield etc, there is no froth in the markets. Infact, IIP, eight core industries and other indicators point to bottom of the cycle is behind and the economy is recovering. Composition of Nifty50 index has also changed with more weightage to non-cyclical sectors. Hence, it commands more valuation than in the past," it further explained.

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But... if all these things go for a toss, which means earnings & economic recovery do not happen, reforms do not work out, crude increases sharply, geo-political risks arise, US specific risks pop up (political, reforms, tax), China growth slows down etc, though are unlikely, then that could be a bigger risk for 12-15 percent market return expectations, Mahesh Patil said while answering to Moneycontrol.

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Aditya Birla Capital believes with lower bond yields & fixed deposit rates and falling real estate & gold prices, equities (with reasonable valuations & good expected earnings) provide good alternative for investment with a horizon for three plus years.

The key themes which it expects to play in 2018 are financials, consumer staples (food beverages, household items, tobacco etc), consumer discretionary (durable goods, auto etc), infrastructure and telecom.

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Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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