Asiamoney Brokers Poll 2017: Best local - India

The government’s demonetization programme that began in November 2016 and which has pumped some $220 billion into the banking system has driven substantial flows to the securities markets over the last year. As the top firm in this year’s Brokers Poll, Kotak Securities has been busy latching onto that trend.

The stock market has seen growth, with mid caps entering the exchanges amid a flurry of initial public offerings this year. Kotak’s coverage has expanded accordingly, reaching some 200 stocks in total, which the firm says puts it ahead of most local competitors.

That is not to say that value is easy to find. Valuations are high across the board with one-year forward price-to-earnings multiples of close to 20 times.

But with allocations to equities growing, sectors such as auto, property, oil and gas as well as IT and pharma have all performed well.

“Valuations are clearly high, but I am not sure what can bring down this market,” says Sanjeev Prasad, co-head of institutional equities at Kotak Securities. “The macro picture remains strong globally, the political environment here is reasonably stable. I don’t know what the potential trigger for a derating of the market could be.” The state legislative assembly elections set for April 2018 leave room for surprises, however, and the government will need to continue with its reforms to tackle issues such as current account and fiscal deficit, as well as the need to open up the economy to more foreign direct investment flows.

So, despite the several supporting factors, if expectations for reforms are not met, the market could be in for a turnaround.

“The market is already priced to perfection, which leaves room for disappointment, given the high valuations,” according to Prasad.

Yet, investors are likely to enjoy the ride because of the still rich valuations across sectors, limited macro headwinds and the potential for good gross and ebitda (earnings before interest, taxes, depreciation and amortization) profitability margins, in particular for sectors such as consumer staples and discretionary companies.

Foreign investors have jumped at the opportunities in the Indian stock market as well. Foreign net inflows in the period from January to September have topped $10.2 billion, compared to net outflows of $1.1 billion during the first nine months of 2016.