Markets have largely been range bound over the last few months. Globally there have been tensions between USA-China followed by USA-Iran, Facebook data leak etc. which brought some nervousness to global markets. In India with BJP being largest party in elections in Karnataka markets could be trending positively but look for further cues in upcoming state elections ahead of the general elections in 2019. The latest quarterly & annual results have also been a mixed set of numbers.
The potential impact from US imposing fresh sanctions on Iran - the third largest producer of crude globally - is among the major factors driving up crude prices. Under the terms of the Iran nuclear deal signed by the Obama administration in 2015, Iran had agreed to limit its sensitive nuclear activities, and in turn was allowed, among other things, to sell oil in the international market. The US had signed that deal in collaboration with UK, France, China, Russia, Germany and the EU. The Trump administration has now pulled out of the deal unilaterally, citing that the agreement was not stringent enough to deter Iran from pursuing hostile nuclear development. Oil prices are at 4 year highs of ~$80/bbl as the prospect of new US sanctions on Iran tightened the outlook for Middle East supply at a time when global crude production is only just keeping pace with rising demand. The global oil market is finely balanced, with top exporter Saudi Arabia and No.1 producer Russia having led efforts to curb oil supply to prop up prices. Many analysts expect oil prices to rise further as Iran's exports fall.
With the next general elections coming up in 2019 every state election before that will act as a precursor prediction to what will happen next year. The election season started on a positive note with BJP being the largest party in elections in Karnataka though they fell short of the majority mark. This should be positive for the broader markets.
I expect the base effects will remain quite strong in FY19 as GST implementation led to disruptions last year. The corporate earnings to GDP ratio are quite low and that is likely to get back to a more reasonable level. One has to go with good quality companies at reasonable valuations and where there is a long term structural story in place. In that respect individual stock picking is more critical in this market. With general elections coming up in 2019 markets may remain stagnant looking for the next major cue to move to the next level.
SIP inflows are still very strong & till MF inflows sustain markets should remain range bound. How international geopolitical events like relations between USA & China, Iran & North Korea pan out will be closely watched. With the 10 year g-sec nearing 8% and the USD-INR above Rs.67/$ both remain a concern. With crude prices inching up & concerns about increased government borrowing/fiscal deficit, both these will be critical. With inflation rates inching up & IIP falling economic indicators also provide some nervousness to the markets. If crude goes above $80/bbl economic indicators will take a further hit but crude money/FII inflows may increase to support markets. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously though short term returns might be limited.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’