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Stock Recommendations for January 2016

Miscellaneous | Published on Jan 07th 2016


A lot of macro factors are falling in place to create the right conditions for the markets to rally in the coming year. Brent crude oil prices have declined ~66% over the last two years to $33 as against ~$99 at the end of CY2013, resulting in significant savings for the government. Led by lower crude prices, the net import bill has reduced at a CAGR of 16% to $115bn in CY2015 as against $192 bn in CY2012, resulting in a steep decline in the current account deficit. With these savings, the government has also been able to maintain fiscal discipline, despite an increase in infrastructure spending. We are already seeing a strong bid pipeline of `120,000cr from the NHAI and of over `244,000cr from the defense sector, expected to get tendered over the next 12 months. Accordingly, we expect uptick in government spending to result in private sector capex cycle revival. We believe the revival in the investment cycle will be the key to push the earnings trajectory upwards over the next few years led by the multiplier effect of infrastructure spending. Inflation too has been on a firm downtrend with the CPI averaging 4.8% between Jan-Nov CY2015, as against 6.7% in CY2014, while the WPI has remained negative. Despite a seasonal uptick in inflation, lower crude prices and sufficient foodgrains stocks, will help keep overall inflation on the downtrend. With inflation under check, we believe the RBI will have enough headroom to reduce policy rates further. Also with banks now beginning to transmit these lower rates, we expect lending rates to decline by ~100-125bps over the coming year, acting as a strong catalyst for earnings growth in CY2016. With growth expected to pick up, India is in fact the best placed among emerging economies to continue attracting higher fund inflows over the long term as China continues to grapple with a slowdown in economy and lower commodity prices will hurt Brazil and Russia. Confidence among domestic investors also continues to remain strong with strong mutual fund inflows of over Rs70,000cr in CY2015. Within large caps we continue to like sectors where earnings growth continues to remain strong such as automobiles and IT. With falling rates and huge underpenetration, we believe retail finance companies, especially players focused on housing finance, are also likely to perform well. From a bottom-up perspective, we continue to like select emerging midcap companies with strong brands, entrepreneurial success and healthy growth outlook. We expect Sensex earnings to increase at a CAGR of 17% over FY2016-18 to ~`1,993. Based on our estimates our one year Sensex target works out to 31,500, implying a 24% upside from the current levels.

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