Sensex plunges 10 pct, but here is where you can still invest; 3 stocks to buy

The benchmark Sensex have slipped nearly 10 per cent from its lifetime high and to make things worse, global brokerage Bank of America Merrill Lynch (BofAML) expects the 30-share index to touch 32,000 by December 2018. In its latest report, Bofa-ML noted that even as equity market is expected to "struggle" over the next few months, stocks and sectors related to rural India might perform relatively better.

"With valuations and earnings expectations still high, Indian equities can continue to struggle over the next few months. Within this setup, we believe stocks/sectors linked to rural India (two-wheelers, cement, staples) should do relatively better," said BofA-ML, 

Rural stocks will perform relatively  better because the government is likely to respond to any actual or perceived loss of political ground by increasing social/rural expenditure (rural already up 24% over two years), while aggregate agricultural incomes are still growing YoY, albeit at a slower pace than last year, explained BofA-ML. More importantly, agriculture is now a much smaller part of rural GDP, it added.  

"Improved rural spending is expected to create better living standards for the rural population. This would result in improved rural consumption and demand," it noted.

As government continues to invest in housing schemes such as Pradhan Mantri Awaas Yojana, construction material demand in rural India is expected to grow.

The report noted that consumption of cement too was high in the third quarter of 2017-18 (October-December). Most FMCG companies reported good volume growth across segments such as soap, shampoo, hair oil, etc. Within autos, two-wheelers witnessed a healthy volume growth.

Amongst covered stocks, BofA-ML likes Mahindra and Mahindra, Hero MotoCorp and Hindustan Unilever. The brokerage has a 'buy' rating on these stocks.

Rural = Agri? Well, no longer!

BofA-ML pointed out that rural India accounts for less than half of India’s net domestic product (NDP), even though it has 70 per cent of the country’s population. 

"Agriculture is a diminishing proportion of rural GDP. Farm distress now has a lower impact on rural income. Data suggests that agriculture as a proportion of rural NDP has fallen sharply, down from 72 per cent in 1970 to 39 per cent in 2012. It is likely to have fallen further since," said BofA-ML report.