Among the large-caps investors can focus on select stocks from sectors like banks, select pharmaceuticals, IT services, metals & mining, and oil & gas, said the report.
Market is expected to remain volatile in 2019 led by factors such as developed market slowdown, US-China trade fears, Brexit, domestic elections, movement in oil prices. Given that, it would be ideal to have a bottom-up approach, pick good quality, beaten-down stocks from respective sectors, Kotak Securities said in a note.
To weather the on-going volatility which may persist till the middle of CY19 (i.e. till general elections), it is ideal to have higher allocation into high earnings growth largecaps and in midcaps with strong management pedigree and reasonable valuations.
Among the largecaps, investors can focus on stocks from sectors like banks, pharma, IT services, metals & mining, and oil & gas, said the report.
Among midcaps, one can focus on stocks from sectors like capital goods, construction and auto ancillaries, it said.
Nifty's valuations look reasonable when viewed against recent historical valuations of ~18-20x on a forward PE basis. According to Bloomberg consensus estimates, one-year forward PE of Midcap Index has now come down to 15.2x and compared to 17x for Nifty50.
“We feel the froth and overvaluation in the Midcap space has come off sharply due to the underperformance vis-à-vis Nifty. We feel there is a very high probability of mid & smallcaps outperforming the largecaps in CY19,” added the report.
For this to fully materialize in CY19, we need earnings recovery and a clear mandate or a single party led coalition government at the Centre. The scope of valuation re-rating remains very high in a host of mid & smallcaps provided earnings stay in line with estimates.
On a 1-year forward basis, MSCI India is trading at 17.5x versus 11.9x of MSCI Emerging Markets. At present, the premium of MSCI India over MSCI EM is 48 percent as compared to the 10-year average of 40 percent.
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