Hope and caution are expected to be the catch words for Indian stocks in the new year after a spate of unexpected events spooked markets in the last quarter of 2016, wiping out a big chunk of the gains in a dramatic sell-off by foreign portfolio investors.

Global fund managers have many options, especially with the US economy picking up steam. Returns from Indian shares were measly this year despite the country topping the world rankings in economic growth. The riskier nature of investments in emerging markets where abrupt policy changes could wreck well thought of plans could haunt investors.

In the tussle between high growth and safe-havens, global cash flow is likely to choose the latter as uncertainties rule the roost.

“The outlook for 2017 is cautious optimism,” said equity strategist L. Hariharan. “Valuations have come down in anticipation of poor results, but there are many positives on the horizon. Interest rates are headed southward and the budget should pave the way for faster growth.”

Investors should accumulate stocks, particularly in sectors where government investments are on the rise such as infrastructure-related — construction, cement, steel, electrical equipment makers, earth-moving machinery and so on, he said. Maruti Suzuki, which makes every second new car sold in India, should also do well because pay hikes for government employees would boost demand.

A cash crunch that stalled economic activity is easing with an increase in the supply of new currency notes. The shock removal of high-value bank notes from the midnight of November 8 had dented consumer spending, hurt manufacturing and hit the sales of farm produce. The government’s move to demonetise Rs. 1,000 and Rs. 500 notes, which together comprised 86 per cent of the currency in circulation, was aimed to flush out unaccounted cash hoards and counterfeits — and the deadline for depositing the banned notes in banks ended on Friday.

Ahead of curve

“I think the worst is behind us,” said Hariharan. “It will take more time for normality to return but the gains from the drive, along with GST, should start to bear fruit from the next financial year.” GST, or goods and services tax, is the biggest overhaul of tax structure since India got independence in 1947 and will help ease doing business.

By putting an end to a large swathe of the parallel economy, which according to one estimate is about $1 trillion or half the size of the formal GDP, the base of taxpayers would widen enabling a reduction in tax rates. If this were to happen, it would put more money in the hands of consumers and would help bolster economy activity.

“We took the demonetisation decision not for some short-term windfall gain, but for a long-term structural transformation,” Prime Minister Narendra Modi told India Today news magazine.

“The multiplier effect of introduction of money which was, till now, uselessly hoarded and stocked away as cash into the active economic system will give the economy a further boost,” he said.

Inflow of funds from foreign investors may remain tepid at the start of the year, but this is more than likely to be offset by domestic funds. Retail investors are also expected to pick bargains before the budget, which is scheduled to be presented to parliament at the start of February.

“In terms of asset allocation, equities stand out,” Prateek Agarwal, chief investment officer at ASK Investment Managers, told ET Now television channel. As debt yields have fallen sharply this year, the scope for further declines in 2017 is limited, leaving shares a better option for investors to stake their surplus cash.

“It is a beaten-down market,” said Agarwal. “It is not building in the kind of growth that we would see going forward.”

“The single biggest benefit of demonetisation and GST that we are expecting over the next few months would accrue to organised sectors. Listed companies would tend to benefit quite strongly. There may be hiccups in terms of what one gets in terms of the budget, but medium- to long-term we really believe equities stand out.”

Brokerage picks

The top-30 Sensex, which is seen by market players as a barometer of the country’s financial health, saved embarrassment by nudging up 1.95 per cent for the year, thanks to rearguard buying in the final days that helped ward off a second consecutive year of losses. However, at 26,626.46, the benchmark was down 8.4 per cent from the year’s high of 29,077.28 in September.

Similarly, the 50-share Nifty that is also tracked by fund managers gained 3 per cent in 2016 to 8,185.80, but was off 8.7 per cent from its September peak of 8,978.70.

Foreign brokerage CLSA’s top investment themes for 2017 include consumer plays, steady earnings prospects, leisure and metals firm.

It expects 12 per cent compounded annual growth rate in volume for leading car maker Maruti Suzuki over 2017-19, driven by multiple new products, easing capacity constraints and pickup in demand as the effect of demonetisation wares off.

CLSA sees 15 per cent earnings per share growth over 2017-19, with potential for faster earnings growth if the demonetisation impact is softer than expected. Maruti is the best large-cap play on Indian discretionary consumption, it said.

Other stocks it has recommended include diversified consumer goods firm ITC Ltd, private-sector ICICI Bank, state-controlled Power Grid Corp, metals firm Vedanta and Zee Entertainment.

Dharmesh Kant, a senior official at Motilal Oswal Securities, believes the best bet in 2017 would be State Bank of India (SBI), as the country’s top lender stands to benefit from greater spending on infrastructure, metals and retail consumption plays.

Besides SBI, he is bullish on engineering and construction conglomerate Larsen & Toubro and top motorcycle maker Hero MotoCorp, with all three tipped to give at least 15 per cent return in 2017.

Among mid- and small-cap companies, Kant told ET Now, he was upbeat on auto-parts maker Sterling Tools, APL Apollo Tubes and Can Fin Homes.

Cement is another sector that offers opportunities, with retail sales picking up after a setback following the demonetising drive. UltraTech Cement is the preferred stock, according to him, while smaller firms like Ramco Cement, Heidelberg and Dalmia Bharat are also good picks.

The writer is a journalist based in India.