5 stocks that need to go out of your kitty this year

Year 2018 has been a volatile affair in more ways than one. Apart from the imposition of the tax on long-term capital gains (LTCG) and dividend distribution tax (DDT) on equity funds, the year also saw nerve-wracking volatility in macros. The Indian rupee (INR), bond yields, crude oil prices, and the current account deficit fluctuated wildly. The year also saw foreign portfolio investors (FPIs) pull out nearly Rs90,000cr out of India over domestic and global concerns.

The index, on the whole, may not have really underperformed, but the damage to specific stocks was quite sharp. In fact, there were some stocks where the damage was caused due to larger concerns. These stock stories need to be observed and their future performance analyzed in order to weed out the underperformers.

Here are five such themes that you should consider before deciding which stocks to trim from your portfolio in 2019.

Weak corporate governance practices will not do

The debate about the relationship between corporate governance and valuation has been going on for a long time. What 2018 proved is that the market will certainly punish companies that are lax on corporate governance. We saw banks like Yes Bank, IndusInd Bank, and ICICI Bank getting the stick for being less than transparent about their asset quality. Then we had mid-cap companies like Infibeam and PC Jewellers that got punished for not making adequate disclosures about inter-group transactions. Transparency and adequate disclosure will be the themes of 2019 and it is best to get rid of companies from your portfolio where there is even the slightest doubt.

Avoid regulation-sensitive stocks for the coming year

There are sectors like power and telecom that are heavily dependent on favorable government regulations in order to be profitable. Issues like power pricing, power sector NPAs, drafting of PPP, spectrum sale, spectrum pricing, etc., are all sensitive to the nature and speed of regulation. With 2019 being an election year, we are unlikely to see any major reforms until a new government is in place. Hopefully, the new government should have a reformist focus. In the same light, it is also better to avoid companies whose managements are known to be politically aligned. It’d more advisable to approach sensitive stocks through the derivatives market. Include them in the portfolio after there is further clarity on the political front.

Heavily indebted companies should not have a place in your portfolio

This is a rule that typically applies to your portfolio at all times, but this problem will be more acute in 2019. Firstly, the US Fed has still not shown any signs of letting up on rate hikes and higher yields in the US will impact borrowing costs in India too. Secondly, India’s CPI inflation is yet to show any impact of the higher marginal support price (MSP) to farmers. Economists believe that this impact will be pronounced after the base effect wears off. Above all, higher election spending could lead to a higher fiscal deficit, which will further raise bond yields. In a nutshell, companies with high debt will face pressure on the borrowing front and also on the bond pricing front.

Best to avoid industrial commodities

Most industrial commodity prices, including oil, steel, aluminum, copper, etc., could be under pressure. The trade war shows few signs of relenting and an inverted US yield curve means that a growth slowdown could be in the offing. The trade war has already hit China and the tariffs could only have a more pronounced impact in the months to come. As Chinese demand slows down, one would see the impact on most of these commodities as stock prices are likely to tail commodity prices on the LME. While steel may still be a domestic story in India, other industrial commodities are likely to come under pressure. These stocks are best avoided in the year 2019.

It is best to stay away from Indian PSU banks for now

To reiterate, 2019 will not be a good year for regulation-sensitive stocks. However, there is another big challenge for PSU banks considering that this is an election year. After the successful win of the Congress in the states of Rajasthan, Madhya Pradesh (MP), and Chhattisgarh, the ruling NDA will be taking the farm sector very seriously. Between now and the general elections, there could be liberal payouts to farmers and the rural population at large to ensure that farm distress is allayed. One of the principal methods will be to waive off farm loans, which has already been witnessed across eight Indian states with the latest being Chhattisgarh, Madhya Pradesh, and Rajasthan. Technically, such waivers are the liability of the state government, but in terms of liquidity, Indian banks may end up using most of their NCLT recoveries this year to fund farm loan waivers.

At a broader level, the choice of stocks will still have to relate to India’s consumption story, which is what 2019 could be all about!