Stock Market

Outlook 2019: Your investment thesis for a year of dichotomies

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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 synchronised.

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 meltdown is global.

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 rates four times.

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 not seem so.

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 hike, there is panic.

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 depreciation.

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.




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