Over the last one year the frontline indexes – NIFTY & SENSEX have largely held on due to only the top 5-10 stocks. RIL, TCS, HUL, HDFC/HDFC Bank, Bajaj Finance & to an extent ITC has helped maintain the index. This looks like a highly manipulated market. The broader markets have in general fallen by 20-30% in the last year. Market sentiments are quite negative looking for a cue from the upcoming general elections (and marginally on any announcements in budget on 1st February, if any). I believe once the elections overhang is over, broader markets will move up. So maybe we need to wait for a couple of more months for the pain to subside. These are market cycles that we have to play out and we have seen historically that good quality stocks give handsome returns from such subdued levels when things turn around.
The year gone by was eventful with a sharp rise in oil prices followed by a dramatic fall, resolutions of large NPAs under Indian Bankruptcy Code (IBC), a 50 bps policy rate hike by RBI, liquidity concern with NBFCs, change of guard at RBI, muted inflation led by lower food prices, rupee depreciation, farm loan waivers by few states among key local events. Globally, escalation of US-China trade war initially followed by a cool off during the year end, rise in US rates and yields, turmoil in Italy, BREXIT uncertainty, China growth slowdown, also made the headlines.
There has been a lot of activity relating to bank recapitalization, NPA resolution & large bad debts write offs in PSU banks in 2018. I feel this short term pain of cleaning up of bad loans augers well for the banking industry and post this larger PSU banks should outperform the markets. PSU stocks are also mostly down due to negative sentiments on government companies & no apparent problems or performance of the company. Once elections are over, sentiments should improve & PSU stocks will move up significantly from current levels. BREXIT clarity will come out by end of March. I think once the BREXIT overhand is gone stocks should move north.
With the general elections due in a couple of months, the budget is generally reduced to a Vote on Account, but what happens this time needs to be seen. There is a general expectation of some tax sops & farm loan waivers could be announced in the budget.
Based on empirical evidence, it has been observed that elections do not impact market returns in the long run. Thus I feel it will not matter for the markets weather BJP or Congress comes as long as we have a stable government. Anyways I think markets are already factoring in a BJP loss at current broader stock levels.
Tax compliance, especially GST collections have declined & with the government taking corrective action, things should improve. Thus fiscal deficit continue to remain a concern.
Given the softness in inflation and low IIP numbers there is a call for a rate cut in the next MPC meet scheduled on 7th February 2019.I expect economic indicators like IIP & GDP growth to gradually improve in 2019.Automotive sales numbers which took a beating in last few months of 2018, due to high fuel prices & low festive demand, should see a recovery. Inflation numbers should also inch up from current levels to settle around 4-5%. Internationally I expect crude prices to stabilize between $60-$70/bbl. Gold which gave stellar returns in 2018 is likely to be a bit subdued in 2019 as equity returns improve. With Chinese demand improving, metals & mining prices should also improve from current levels.
It has been seen that quality companies outperform when markets turnaround, thus we need to be a bit patient with our holdings. Latest quarterly results for most frontline companies (barring a few automotive stocks) have been quite good. Thus valuations are quite attractive given the decline in stock prices. Markets are trading at about FY20 expected normalized P/E of ~15x and market cap to GDP ratio of ~65%. PSU banks & metals & mining companies which were reporting losses till now are expected to turn positive.
Thus positive profit growth outlook, steady mutual fund flows, reasonable valuations & macro-economic indicators remaining stable augurs well for the markets. Short term investors should remain cautious as markets could be extremely volatile in the next couple of months but any intermittent volatility should be used as an opportunity by patient investors with medium to long term outlook to accumulate good quality stocks.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 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’