What equity investors need to do in 2018?

In a popular southern movie, a comedian, after robbing jewels from a rural woman from the Marina Beach, rides proudly (with optimism that the looted jewels are safe with him) on a horse kept there for entertaining the children. However, to his dismay, the horse, after completing a round, comes back to the same place where it started as it is trained to do so!

In the stock markets also, this story of horse happens quite regularly. A few recent examples of quick multi-baggers returning to the base levels are Shilpi Cable, Energy Development Corporation, Pincon Spirits, etc. Thus, the focus of the retail investors in 2018 should be to conserve the wealth created especially from the multi-baggers in the equity markets in 2017.

So far in 2017, the Sensex has moved up by 28%. However, the market cap of entire BSE-listed stocks has gone up by 34% to nearly Rs 151 lakh crore, which is 95% of India’s GDP. This is mainly on account of mid-cap segment outperforming the Sensex for the fourth year in a row in 2017. The boom in the secondary market has spread to the primary markets also. As many as 153 initial public offerings (IPOs) hit the Indian markets and sucked out nearly Rs 75,000 crore.

The wealth created by the Indian equity market in the last three years has been phenomenal. The overall market cap of all BSE-listed stocks moved up by 54% from Rs 98.70 lakh crore in January 2015 close to Rs 151 lakh crore now.

It is doubtful whether the overall markets can repeat such rise in the year 2018 considering the current valuation of markets as well as individual stocks, liquidity already sucked in by the markets and Index of Industrial Production growth struggling to move beyond 3%.

In the possible scenario of nominal return (around 10% to 12%) expectations from the overall markets in 2018, apart from conserving the wealth already created from many multi-baggers, the retail investors could try betting on following individual stock themes to continue to create wealth from the equities. Least leveraged and efficient tyre producers could continue to do well as the import of Chinese tyres have fallen a lot and also automobile sales have picked up significantly. Some of the mid-sized IT companies might once again outperform the overall markets as large IT firms are struggling and growing their revenues in single digits even in rupee terms. Hence, consolidation of mid-sized IT firms might continue and in the process, their valuation multiples could get further upgraded.

As crude oil price has gone up more than 100% from the last year bottom and by more than 40% from 2017 bottom levels, oil and gas producers could perform much better both in the business and stock markets. As non-performing assets (NPA) levels of the banking industry are peaking out and government-owned (PSU) banks are also able to mobilise significant quantum of financial resources through QIPs, some of these PSU banks relatively better in terms of net NPA levels business growth and price to adjusted book values could create significant wealth in the markets. The consolidation process, which started more than two decades ago in the old private sector banking (OPSB) space, might continue from 2018 as some of the large private banks are also seeing a surge in NPAs or moderation in business growth. Hence, a few of them may look at possibilities of acquiring OPSBs, some of which are trading at a fraction of the market cap of large private banks.

The writer is founder and MD, Equinomics Research & Advisory