Consumption, affordable housing and healthcare are possible beneficiaries of acceleration in the government spending on welfare programmes, CLSA said.
The broader markets, which were the biggest gainers of 2017, continued to underperform frontline indices in 2018, as well as, at the beginning of 2019. Reasons were many, but important ones include crude and rupee volatility, higher interest rates, IL&FS-led liquidity crisis in NBFCs, FII outflow, additional surveillance measure, and a slowdown in incremental flows into mutual funds.
Domestic mutual funds also had a large portfolio churn in first half of 2018 on the back of new SEBI categorisation and strong inflows, CLSA said, adding incremental flows into mutual funds have come off from their highs of $3 billion per month in FY18 to $1.6 billion per month in FY19 so far.
From 2018, the 30-share BSE Sensex has gained 6 percent so far and Nifty50 2.8 percent, but the BSE Midcap index plunged nearly 15 percent and Smallcap 24 percent.
As far as 2019 is concerned, Midcap dropped 1.6 percent and Smallcap 0.5 percent while Sensex gained 0.11 percent and Nifty 0.4 percent.
Hence, CLSA said midcap valuations are now more reasonable (a 2-percent discount to India's Nifty), compared to all-time highs seen in December 2017 (a 43 percent premium). However, it expects midcaps to face bouts of volatility in 2019 given macro uncertainties and spread in headline earnings growth for Nifty midcaps vis-à-vis Nifty narrowing in FY20.
According to the global brokerage house, the Indian national elections during the first half of CY19 could lead to market volatility.
"Midcaps though have outperformed post-election outcomes in the last three cycles. Considering that the spread over Nifty earnings growth is also likely to narrow in FY20, we believe tailwinds are lacking for Midcaps in general, though good bottom-up opportunities are emerging post the correction," it said.
Hence, CLSA said bottom-up opportunities are emerging in select themes like consumption (branded apparels & QSR), healthcare, affordable housing and government welfare spending beneficiaries.
Its screen across a large universe of midcaps suggest that property, branded apparels, flexi staffing and QSR companies are reporting strong growth momentum over the last few quarters.
"Developer funding issue is a near-term growth headwind for building material companies, but it continues to prefer housing as a structural theme. Listed residential property developers are also seeing strong traction given the undergoing consolidation in the residential real estate sector triggered by the Real Estate Regulatory Act (RERA) reform in 2017 and accentuated by the NBFC liquidity crunch," it reasoned for selecting housing as a theme.
CLSA prefers hotels as a cyclical play because a slower new supply since FY15 and continuing demand bode well for occupancy and room rates over the next 3-4 years.
Going into national elections, it expects government spending on welfare schemes to be positive for select stocks. Hence, consumption, affordable housing and healthcare are possible beneficiaries of acceleration in government spending on welfare programmes, it believes.
"Government's key schemes like 'Ujjwala' (LPG roll-out), 'Saubhagya' (LED bulbs), Rural Housing & Electrification could generate incremental consumption demand for companies like TTK Prestige, Supreme Industries and Crompton Consumer," it said.
The brokerage also raised its FY19/20CL estimates for Crompton Consumer by 4-8 percent to build in the impact of lower ESOP expenses going ahead. Also, it increased Pidilite FY20CL estimates by 4 percent given the sharp fall in crude prices (its key raw materials are linked to crude). It also increased PVR and Inox estimates by 3-8 percent with concerns around F&B uncertainty easing and deal with online aggregators.
Hence, CLSA said among midcaps, Aditya Birla Fashion & Retail, Apollo Hospitals, Godrej Properties, Lemon Tree Hotels, Supreme Industries, TTK Prestige and Westlife Development are preferred picks in its coverage universe. However, Pidilite and Voltas are key sells given expensive valuations, it added.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.