Model Portfolio Of Mid-Cap Stocks To Buy For 2017 By Stewart & Mackertich

Samvat 2072 remained an eventful year which ran into unwarranted pessimism and ending with cautious optimism. Whereas the pessimism emanated from global factors, the latter is drawn from improving economic fundamentals of the country which is likely a result of lower inflation, lower interest rates, a good monsoon, better purchasing power due to seventh pay panel hike and slew of government measures to uplift infrastructure development and the GST implementation.

As we approach Samvat 2073 stock market valuations (Nifty P/E) is trading at 21.66 on current earnings -which is 19.90 percent premium to 10 years average of 18.08 and 7.54 percent premium to previous year Diwali eve of 20.74. CNX Midcap 100 is trading at 35.91 vs previous Diwali eve valuation of 27.83.

Uncertainties related to US presidential election outcomes and the policies set thereon, the increasing rift between Russia and the combined forces of US and its allies regarding Syria and other geopolitical issues, rate hike fears from FOMC, withdrawal of quantitative easing by ECB and others, reversal of commodity price trends to higher levels which may make other emerging economies attractive for investment – are factors that may keep the broader market gains in check during the Samvat 2073.

Never the less we have signs of improvement in the economy led by decline in inflation and interest rates, a good monsoon and seventh pay commission hike in salaries, direct transfer of subsidies to the needy, improved perception among global investors towards India, GST implementation, increase in domestic liquidity. These factors augur well for domestic consumption and investments.

The efforts of the government to revive infrastructure, power and other core sectors coupled with emerging trends in e-commerce and disruptive forces may pave way for emergence of small and mid-cap stocks across sectors. Therefore, the broader market returns may remain limited during Samvat 2073, but select stocks across mid and small caps may outperform benchmarks.

On the eve of Samvat 2072, Nifty is trading at 15.59 times FY18 E earnings. Assuming the estimates are met, we believe Nifty is likely to trade between 14.5-17 times FY18E earnings during Samvat 2073, which gives a Nifty range of 7737 on the lower side and 9395 on the higher side. Keeping this theme in focus, we have identified 11 stocks across sectors and size that we believe may outperform the broader indices. Brief details of the same given in exhibit below: