Invest In Frontline Stocks

Shrikant Chouhan
VP – Research
Kotak Securities

Currently, the Indian markets are fairly valued. Hence, though the Mid-cap stocks or stocks which are not part of the index can do well, we are expecting some correction in the frontline stocks. From these levels, we can expect either a correction or the markets to remain in a range until any major trigger comes from the world or the domestic markets.

The market is keenly waiting for the inflation and IIP numbers, which definitely remain two triggers for the market going forward. The inflation and IIP numbers are very important, because this time the governor can be expected to take concrete action in case there is any rise in inflation. So, this month is very important, and that is why we are expecting some cautious activity in the market. The markets will remain in a range, between 6400 on the upside and 5900 on the downside.

The results season will remain in line with expectations, and companies going through restructuring may come out with some surprises. Deleveraging seems to be the theme of the coming year, and companies like GMR Infra, GVK or JP Associates are coming down on their leveraged positions. This will help improve the bottomlines of the companies due to lower interest burdens. Any improvement in the toplines seems difficult, the reason being the restructuring process leading to weak sales.

On the market front, I am of the view that the trigger will come from the government side. Domestic flows are very important. Also, IIP numbers and inflation are two important factors that have the ability to change the trend of the market. This, otherwise is very difficult, as the world markets are trading at their highs. I believe that the currency will not see a great deal of appreciation. Hence, the flows will come in a very selective manner, and they may as well wait for the outcome of the data which is expected to be out this month.

The global markets, especially the US markets, are going to do well as they are trading at their lifetime highs without any major corrections and participants are still not convinced with the overall trend of it. The European markets are following the trend of the developed markets. As for the emerging markets, I would say Taiwan, Kospi and Nikkei they have done well.  India is still at the bottom of the last two years of percentage gains. There is scope for the Indian markets to improve, Elections are going to create uncertainty, but it will be an opportunity for investors to invest at bargaining levels. I am of the opinion that the markets will depend more on the domestic news flows, which are initially going to disappoint but should improve in the later part, which will help the broader markets to improve.

If I have to take a bigger call on the market then I would say that whichever government comes into the power post the elections they would have to act on infrastructure, as it is very difficult for the Indian economy to improve without a proper infrastructure policy in place. A lot of people are betting on the BJP government. If that holds true, the markets will start discounting to it well in advance and that could be taken on the investment front, which will result in flows into the Capital Goods and Infrastructure space. Larsen & Toubro, Crompton and Siemens are the stocks to look at because they are trading at decent support levels and with a breakout kind of formations on the long-term charts.

Defensives are trading at their lifetime highs, with rich valuations. In my opinion, Capital Goods and Infrastructure are the stage to look for. After that, one can look out for Metals, where a lot of stocks are trading with a positive reversal on the long-term charts and the volumes are encouraging. By investing in these kinds of stocks (gradually on declines) for the next six to 12 months, I am sure that one can make money.

We would advise retail investors to invest the major part of their funds in frontline stocks. Even though Mid-Cap stocks are doing well right now, it is very difficult to pick and hold them for a longer period of time until and unless the market is trading above the lifetime highest level of 6357. It is better to invest in indexed heavyweights like Reliance, State Bank, Infosys, etc. as well as in consumption giants like Page Industries, Jubilant Foods and Zee Entertainment at least for the next 12 months to get good returns.  If the market falls even by 10 or 15 per cent in the next few months’ time, it makes sense to invest as the markets have formed a strong base in past 12 months. This will result in them moving beyond (multi-year hurdle) 6400 sooner or later, and that should be the multi-year bull-run for the Indian equities with a minimum target of 8000 on Nifty.