Crude prices may head higher by 2018-end; Here’s what to bet on, and what to avoid

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Large caps have kept the benchmark indices higher and midcaps have been struggling in the past few weeks. In spite of the recent trend, Nifty(P/E) is still at about 18.5 percent premium to historical averages, Suhas Harinarayanan, Head-Institutional Equity Research, JM Financial Institutional Securities notes. In an interview to Moneycontrol’s Sunil Shankar Matkar, he said . Edited excerpt:

Amid trade war fears, weakness is seen in currency as well as relentless selling in small & midcaps. What are the domestic factors which can dampen investor sentiment?

Some of the domestic factors that could dampen investor sentiment, in addition to the above mentioned (in question), are the uncertainty around elections, pace of increase in interest rates, and fiscal deficit.

It would be interesting to see the strategy taken by the government on procurement of the farm produce wherever minimum support price (MSP) is applicable. The endeavour would be to lower the fiscal burden while being non-inflationary.

Do you think the broader market is trading at attractive valuations after the recent correction?

As we know, largecaps have kept the index higher and midcaps have been struggling. In spite of the recent trend, Nifty(P/E) is still trading at about 18.5 percent premium to historical averages. We should see growth coming back this quarter onwards and so with time, this premium would be adjusted.

Do you see double-digit growth from India Inc. earnings in June quarter itself or will the recovery take time?

Our forecast is earnings growth of 20.6 percent YoY in Q1FY19. This quarter is marked by increase in rural demand, consumption revival and low base effect of GST last year. Given the low base effect for many companies, we would hesitate calling this “THE” recovery quarter.

What is your outlook on crude oil prices and rupee after recent volatility?

We note that the fall in rupee was driven by the strength of dollar index as other emerging currencies also weakened. It has been shown that oil above USD 70 per barrel is not the best situation for India and we saw the kind of pressure on the markets as oil hurtled towards USD 80/bbl.

There is a lot happening in the oil market and a lot of oil experts we speak to suggest that oil could be headed higher again by the end of the year.

What are sectors to play on and to avoid now? Which sectors will drive the market from here on?

There are a couple of pockets where we have backed companies to do well. One being the consumer discretionary sectors that derive significant portion of their income from rural India. The second one being the private financials, NBFCs and retail oriented banks. We have faced a lot of questions on when we would start backing the corporate banks.

We track the capex intensive sectors viz., power, metals, real estate, and infra closely, and while government infra is ongoing and we are beginning to see some form of revival in capex in metals, the larger sectors are unlikely to witness a stronger revival until another 12-18 months given their underutilised capacities and inventory levels.

Having said that, stocks in the broader industrials space are beginning to look good on valuation basis. There could still be opportunity to buy these names in coming 12 months but this is a sector where we are incrementally positive.

We would continue to avoid government-related companies, especially among the banking and oil sector.

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