According to a recent study done for the calendar year 2017, nearly 90% of the actively managed funds actually managed to beat the index. Of course one can argue that the number would have been smaller had you considered the Total Returns Index (TRI) instead of the Absolute Returns Index (ARI). That would have, at best, made a marginal difference to the final outcome. The fact is that Indian actively managed funds actually shone bright. That is because globally less than 20% of the fund managers are able to beat the index with the balance 80% lagging the index. So, if you were to chart a game plan for the year 2018 to beat the Nifty what would you strategy be? How to beat Nifty and how to beat the Nifty index? Here is the future of Indian stock market in 2018. It can actually be predicated on 6 key factors..
1. Create a portfolio ignoring the obvious laggards
Finding potential laggards in the index is hardly difficult. For example, if you create an index portfolio and just ignore the PSU banks and the pharma stocks, then you are likely to outperform the index. With NPA resolution nowhere in sight and an election year coming up, you can surely look forwards to tepid performance from most PSU banks. While IT has shown some traction in the last year, the pharma woes continue. With the US tightening its investigations against overpricing by generic drug makers, Indian pharma companies are likely to be subdued. So if you create a simple index portfolio and just exclude the PSU banks and the pharma companies, you are very likely to beat the index in this year.
2. Focus on the big rural story; therein lies the alpha
There are quite a few things going for the big rural story in India. Year 2018 is the last full year before the election year starts and one of the focuses of the government will be on improving farm incomes. The government had promised doubling of farm incomes by 2022 and will want to show tangible progress on that front. Also the higher MSP at 150% of production cost will be a major factor in improving the earnings of farmers. This will generate demand for fertilizers, agrochemical, hybrid seeds, drip irrigation systems as well as indirect demand for two wheelers, FMCG products etc. Al these sectors are likely to beat the Nifty and one can position their portfolio accordingly.
3. Commodities could surprise on the upside
Quite a few interesting events have happened in the last few weeks. GDP growth has shown signs of picking up across the developed world. The US-China trade war appears to have fizzled out and died a natural death. With the peace pipe being smoked between North and South Korea, most of the geopolitical risk appears to be factored in. That could be the perfect inflexion point for commodities, especially industrial commodities like aluminium, copper and zinc to outperform. One can position the portfolio accordingly.
4. Be overweight on consumer stocks
The one story in India that refuses to die down is the consumer story. Stocks like Britannia and Hindustan Unilever have given returns in excess of 50% in the last one year. This was largely on the back of a favourable GST regime and higher demand sustaining top line growth. This year, these consumer stocks are likely to continue to dominate as they reap the full benefits of better logistical efficiencies. One of the best ways to outperform the Nifty in the coming year is to go overweight on consumer stocks, with special focus on the food segment, which has seen a genuine spurt in demand.
5. Housing could lead a revival this year, finally..
Even CLSA had identified a revival in housing as one of the big themes for this year. There are plenty of reasons. Firstly, housing has been in a lull for a long time and leading real estate companies have substantially toned down their debt levels. The combination of monetization of commercial real estate assets and reduction of debt has made them a lot more valuable. Additionally, housing finance companies have also corrected sharply and they offer a good indirect play on the housing sector revival. While the universe of these stocks may not be too large, even a 10% exposure can add to the alpha.
6. Focus on the NCLT buyers for value picks
Watch out for the companies that are among the buyers in the NCLT segment. Most assets are available quite cheap considering the haircuts that lenders are being forced to take. For companies in the steel and cement industry, this offers a perfect opportunity to enhance their capacity at low costs in anticipation of a pick-up in demand. If the NCLT process starts getting completed faster, then these NCLT buyers could be genuine candidates to beat the Nifty.