Invest in defensives ahead of the assembly elections outcome: Reliance Securities

Ajmer: A voter smiles as she shows identity card during the state Assembly elections, at a polling station in Ajmer, Friday, Dec.07, 2018. (PTI Photo)(PTI12_7_2018_000059B)

A sharp downward reversal in crude prices seems to have turned fortunes in favour of Indian equities while looming concerns pertaining to assembly and general elections and ongoing liquidity crisis especially in MSME segment could be key overhangs for Indian markets for next 2-3 months.

The outcome of the state elections on December 11 will be crucial for the sustainability of the last week's rally. We continue to advise investors to play defensive and invest in sectors or companies where valuations are attractive and least exposed to global developments.

Consumption, infrastructure (EPC players) and private banks continue to be our preferred bets in the near-to-medium term.

The renewed revival of FPI flow into Indian markets (infused over ~Rs 12,200 crore in November 2018, highest in current fiscal) is mainly due to the diminishing outlook of US dollar and seemingly improving twin deficits in India led by possible lower oil import bills.

However, the sustainability of oil prices at lower levels and consistent improvement in GST monthly collection beyond Rs one lakh crore are crucial, which needs to be validated. In this regard, the market may consolidate for some time until it sees further clarity on these aspects.

Volatility index (VIX) above 19.2 continues to show nervousness in the market. High rollover of short positions despite an upturn in indices reflects investors are concerned about the outcome of elections.

However, dovish statement on further rate hikes by Fed Chief Jerome Powell, widened valuation premium between India and US equities (USA trading at 49 percent premium on market-cap-to-GDP ratio) and possibility of earnings moderation of US companies on higher base may continue to attract foreign institutional investor flow into Indian markets, thus supporting Indian rupee and bond markets.

While the current valuation of Nifty 50 at 15.4 times for FY20 earnings appears to be attractive, it factors earnings growth of 23 percent during the year, which looks to be on the higher side in our view. Earnings may be downgraded further in case we do not see the faster resolution of banking crisis through IBC.

Last week, GDP and fiscal deficit data were not encouraging, but going ahead investors would keenly watch oil prices and pick-up in tax collections for the second half of FY19, which is expected to show improvement.

Further, 90-days ceasefire in trade-dispute between USA and China (as agreed in G-20 summit in Buenos Aires) may ease the concerns of global growth in the near term, but investors may be in wait and watch mode till they see any progressive development in next three months.

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