In an interview with CNBC-TV18.com, Gautam Duggad, head of research – Institutional Equities, Motilal Oswal Financial Services, said that he believes that the markets are fairly valued, however, Prime Minister Narendra Modi's massive victory can stretch the valuations further. His top picks include the SBI, ICICI Bank, Titan, L&T, and NTPC. He also expects the Reserve Bank of India (RBI) to cut interest rates in its June meeting. Edited Excerpts:

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What are your expectations from the new government and for the markets?

We expect Modi 2.0 to focus on growth revival and to revive the animal spirits in the economy. The benefits of structural reforms of the first term will be reaped in this term. Rural consumption, private investments, and liquidity issues in the economy need the government’s immediate attention, in our view. From a market viewpoint, we expect the new administration to address the issues concerning rural consumption moderation and NBFC (non-banking financial company) liquidity stress while continuing to prioritise infrastructure investments. This will provide a strong backdrop for bullish market sentiments.

Do you think markets are fairly valued at current levels? If not what should they be valued at?

We do believe that, at 20x FY20 Nifty EPS, the market is fairly valued. However, positive sentiments post the massive and unprecedented verdict for Narendra Modi can stretch the valuations further. If FII flows continue to remain robust and domestic flows see pick-up, then sentiment and liquidity can overweigh valuations in the short term.

What are you Nifty and Sensex targets for December 2019?

We do not have an index-based target but if current valuations were to sustain, then in December 2019, we will be looking at Dec’20/Mar’21 EPS. Applying similar 20x multiple, we get a target of around 13,000 for Nifty.

The election outcome is as anticipated by the markets. Do you think this is a good time to buy, or should investors wait for the markets to consolidate? What are your top five stocks pick in the current scenario?

We do not believe that timing the market makes a big difference in the long term returns of a retail investor portfolio. Investments should be done in a consistent and systematic manner with a sharp focus on asset allocation. Our top five picks are SBI, ICICI BANK, TITAN, L&T, and NTPC.

PSU Banks are on a high since Modi's win. Do you think the RBI will reduce repo rates in its June meeting? Also, what are your top picks in the sector?

We do expect the RBI to cut repo rates in the forthcoming policy. Our top PSU Bank pick is SBI.

What should be the top priority for any investor in the current scenario and what kind of stock should be preferred?

Stock selection criterion should be centered around earnings visibility, quality of management, growth longevity, and valuations. In the current circumstances, we expect cyclicals like financials and quality industrials to do well.

Which sectors do you think will outperform under the new Modi regime and why?

We like financials, consumer staples, discretionary consumption, industrials and IT. Financials will benefit from the turnaround in asset quality cycle, market share gains from NBFCs and revival in credit growth. Consumption remains a structural story and is agnostic to the government in power. We expect industrials to benefit too in this term as private capex should see gradual revival going forward. We like IT given the consistent earnings growth, reasonable valuations and strong cash returns to shareholders via buybacks/dividends.

What are the top challenges for the Modi government?

Reviving the private investment cycle is a key challenge and opportunity. In the short term, handling the liquidity issues is an important challenge as it has several implications for financials as well as consumption. Achieving a golden mean between inflation and rural real income growth is a structural challenge.

Mid-caps have been underperforming for the last 18 months. Do you think the time for these stocks is back and they will outperform large caps soon?

We expect mid-caps to outperform large-caps as we believe revival in sentiment and expected improvement in flows augur well for mid-caps. Valuation discount and underperformance versus large-caps do provide a good bottom-up opportunity in mid-caps.

How much of an effect the US-China trade worries will have on the Indian markets. What other global factors should one look out for?

It will dominate the global sentiment and flows and in an increasingly connected world, India cannot remain immune to the vagaries of global events. Other global factors that one should keep an eye on include crude oil prices, US Fed policy rates, and Chinese economic growth moderation (implication for commodity prices).

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