Govt ups spending ahead of national polls and an expanding economy takes centre stage on the back of growth in manufacturing and services industries. (Photo: File)

Indian stocks are likely to post vibrant gains in the first half of 2019 as the government ups spending ahead of national polls and an expanding economy takes centre stage on the back of growth in manufacturing and services industries, analysts say. Meanwhile, the benchmark index Nifty is set to post its worst annual return in the past three years as a series of electoral defeats of the BJP, a weakening Rupee and tepid earnings growth pushed bulls on the backfoot during 2018. The index rose just 3.1 per cent since January 1st.

There are several macro factors that are turning for the better over the past 2 months and that is a source of great comfort to the bulls. Inflation has slowed considerably since November and that may prompt the Reserve Bank of India to shift its stance towards easing interest rates over the next two quarters. Liquidity has also improved in the wider money markets where short term indicators such as money market rates, government bond yields and the yield curve have eased since October end. Add to this crude oil prices at 16-month lows and a higher output in coal and cement. All these point towards a slightly better macro economic climate  where stocks will operate during 2019. The government has also done its bit by cutting down GST rates in dozens of products. All these put together may trigger a spending rush in the wider economy and inevitably push stocks higher. Domestic demand will be the key driver for growth.

``The first half of 2019 would be marked by hopes and the latter half by expectations,'' Deven Choksey, Managing Director at K R Choksey Stocks & Securities, said. ``Few stocks with high conviction for investments may include HDFC Life, Bajaj Finserv, Sterlite Technologies, Reliance Industries, Network 18, Bajaj Auto, HDFC Bank and Kotak Bank.''

Global brokerages such as CLSA are expecting an earnings growth of an average 18-20 percent for 2019 on Nifty's 50 stocks and are basing their forecasts on a turnaround in corporate lenders such as ICICI Bank and State Bank of India. Other stocks that can be invested into include Larsen & Toubro and BHEL primarily because of an upturn in domestic infrastructure building and the potential of more orders from coal based thermal plants in the case of power equipment maker BHEL.

So, what could spoil this planned party?

National elections in April-May has the potential to create volatility in asset prices as major political parties outdo each other in promising electoral sops. Although large scale farm loan waivers are not expected there exists a mild risk of the fiscal deficit running out of control in the first half of 2019 as government spending increases dramatically. Much focus is likely to be concentrated on 20 crore rural voters whose main source of income is farming. They have traditionally not aligned with the ruling Bharatiya Janata Party over the past five state elections and rural India remains the BJP's weak point. However, central schemes such as distribution of gas cylinders to rural and urban poor, the direct bank transfer of subsidies, toilets, rural housing and higher support prices for many agricultural products may swing the vote in favour of Prime Minister Narendra Modi.

By Shailendra Bhatnagar, Market analyst from last 2 decade