Despite a near 20 per cent rise in the markets in calendar year 2017 (CY17), Credit Suisse remains optimistic on the road ahead and sees no major downside, unless global cues disappoint. In its 'India Market Strategy' report released Wednesday, the global research and brokerage house expects domestic flows to remain robust thanks to improvement in financial savings and support the market on every correction.
That said, Neelkanth Mishra, managing director, equity research at Credit Suisse does caution on more corporate earnings downgrades going ahead. On a calendar year-to-date (CYTD) basis, all sector except metals, Mishra says, have seen EPS cuts, with the sharpest cuts in telecom (from profit to loss), pharma (cut by 35 per cent), PSU banks (30 per cent) and discretionary (20 per cent). In this backdrop, he maintains a negative view on pharma and PSU banks.
"FY18 consensus EPS growth of 11 per cent is likely to settle in mid-single digits. FY19 EPS growth is currently building in sharp rebound. The cuts are likely to be harsher for banks, discretionary, pharma and consumer staples sectors as the overall growth remains benign. Private sector banks, however, remain an overweight in our portfolio," Mishra says.
On a more macro view, Credit Suisse remains concerned on the muted economic growth - as reflected by the drop in demand for oil, cement, power and truck rentals. It also believes the impact of the goods and services tax (GST) on tax collection and overall economy is still unknown.
"With 40 per cent of India's taxes getting affected, frequent changes suggest revenue neutrality may be harder to achieve; centre-state split of 50:50 also to have an impact. Though food inflation is likely to stay muted, a reversal of declines is equally likely," Mishra says.
While the economy is going through too many unknowns, Credit Suisse believes, that the relationship between the economy and the markets is tenuous at best.
"Not only are market returns more price-to-earnings (PE) driven, markets and economy also have different structures. Large informal economy, large parts of formal economy are not listed, a large part of market is driven by global factors or is growing penetration and share," Mishra says.
Against this backdrop, Credit Suisse recommends a bottom-up stock picking approach. Consumer, financial services (private banks) and metals (prefer steel) the three sectors it is bullish on. He also said 'value as a trade' is making a comeback.
"We suggest consumption-driven names, such as the autos, as it should benefit from reviving rural growth (so far normal monsoon, as if August 28 with 3 per cent below long-term average rainfall). We are also positive on the commodity space as we believe growth in China and the US paints optimist picture," says Vijay Shah, head of advisory and sales, Wealth Management India at Credit Suisse.