INSUBCONTINENT EXCLUSIVE:
As I look forward to Calendar 2019, I see a large number of moving parts, which will influence market
Positioning of central banks globally is varied, compared with normal tightening and loosening cycles, which have traditionally been
Political influence on economic performance and market volatility is greatest in several decades and, specific to India, we have general
elections in middle of 2019.
Lately, we have seen an unprecedented selloff in US markets and a relative calm in emerging markets
So, could decoupling be a theme for 2019 As history has shown, if there is a big crisis, then there is no decoupling and financial market
However, if a crisis is avoided, then decoupling does play out.
Was selloff in US markets justified It was
There has been an unprecedented tightening by US Federal Reserve; it has reduced balance sheet size by nearly $400 billion and increased
The impact should be a decent slowdown in US economy next year contrary to what is currently speculated, and markets are factoring in
that.
The other part of that story is whether we were at bubble valuations like in 2000 and 2008 and shall we see a similar selloff It does
Under circumstances, it will be a normal corrective wave of 20-25 per cent.
ValuationsUS market’s P/E is just 14 times and emerging market
equities are trading at very cheap valuations at a P/E of just around 8-9 times
Global growth should continue to soften next year as US, Europe and China continue to slow down
So, should equities do something great when growth is slowing down
The dichotomy of low valuations but slower growth should keep overall
returns subdued to start with
However, as tightening bias reduces in a few months, we should see positive returns overall
Risk in markets is not same as perceived.
When market falls, rupee comes under pressure and when there is a possibility of interest rate
These are typically best times to invest
Data supports this.
The other big fear playing out is ‘fear of elections’
Post elections, once uncertainty ends, markets tend to do well.
For India macro factors have turned positive with decline in crude oil
prices, fall in bond yields and a recognition by Central Bank that it needs to improve liquidity
Inflation is at a multi-year low and positive booster for consumption
The order books of infrastructure companies are strong, bank balance sheets have been cleaned up and corporate leverage is at multi-year
lows, contrary to many other economies where same is very high.
Corporate profitability remained under pressure in 2018 due to a sharp
increase in commodity prices within a very short period of time, and also an increase in interest rates
Both these factors are likely to reverse next year.
Some themes that can be played next year will be:Building material stocks have become
cheaper and provide good growth opportunitiesCapital expenditure cycle revival will present opportunities in capital good stocks, especially
midcap playersInfrastructure stocks are very cheap and will do well as rate hike cycle seems to have peakedCement sector could be starting a
strong upcycleAutomobile stocks have become cheap relative to their long-term potentialSectors to be avoid will be technology i.e
IT services, as we are likely to see a significant slowdown in order flows as US economy slows, plus they lose advantage of rupee
Commodities in general should be avoided as prices will remain subdued.In conclusionCalendar 2019 will have several pulls and pushes
India with its relatively insulated economy is well placed
Broader market opportunities are huge, when inflation is low, interest rates stable and input cost pressures are low
All of these ingredients are present today
A significant improvement in Ease of Doing Business ranking for India, digital economy and GST are improving efficiencies and creating
possibilities of a higher growth rate with lower inflation
Any improvement in trade tensions between US and China will be an added positive, but that cannot be forecast at this stage.
Overall, India
is well placed in global context and next 2-3 years will show that
Markets will be higher same time next year and much higher beyond that.
