Most analysts see a continuation of the Modi govt's reform process in 2019 and the index hitting fresh record highs soon
A historic moment for D-Street as Modi-led government completes its fourth year in office on May 27. It has been an eventful journey for the market participants with benchmark indices hitting fresh record highs in the year 2018.
Although, both Sensex & Nifty corrected slightly from its record highs of 36,443, and 11,171 respectively which was recorded in January 2018, but most analysts see a continuation of the reform process in 2019 and index hitting fresh record highs soon, but investors should be more stock specific.
“The focus of Modi government for four years was on governance and economy. Well, that could change for the next one year as politics would be high on agenda. Moreover, the macro conditions have turned unfavourable,” Gaurav Dua, Head of Research, Sharekhan by BNP Paribas told Moneycontrol.
“Thus, the returns on the index level could be sober than last few years. However, the market would offer a lot of many making opportunities and among pockets of growth stocks especially the consumption space over the next one year,” he said.
The total market cap of all BSE-listed companies rose by over Rs 62 lakh crore in the last four years. The BSE market cap rose from Rs 85 lakh crore recorded on May 26, 2014, to Rs 147 lakh crore recorded on May 25, 2018.
We have collated five different charts which track the journey of markets, rupee and crude oil in the last four years:
Movement of Sensex & Nifty:
The S&P BSE Sensex rallied from 24,716 levels recorded on May 26, 2014 to levels above Mount 34K in the year 2018, which translates into a gain of over 10,000 points or 40 percent.
“The 4 years of Modi government have been a roller coaster ride with its share of ups and downs. There was a lot of euphoria around the election of Mr. Modi as the PM of the country and the citizens looked up to him to bring a wave of change in the country,” Jimeet Modi, Founder & CEO, SAMCO Securities & Stock Note told Moneycontrol.
“The performance of the Modi government has been remarkable in terms of planning and execution of some policies whereas the macroeconomic numbers aren’t all that rosy,” he said.
The Nifty50 rose from 7,359 levels recorded in May 2014, to levels above 10,000 in May 2018. The Nifty closed at 10,605 on May 25, 2018 which translates into a gain of 44 percent in the last four years.
Movement of Smallcap index in last 4 years:
The S&P BSE Smallcap index rose nearly 90 percent in the last four years but as many as 377 stocks rose 100-6000 percent in the same period which includes names like Uniply Industries, Minda Industries, Avanti Feeds, Capital Trust, KEI Industries, TVS Electronics, HEG, IFB industries, Tata Metaliks, Rushil Décor etc. among others.
After rallying consistently for 3 consecutive years, smallcap stocks came under pressure in the year 2018 which halted or slowed down the winning momentum which started with the formation of the Modi government back in the year 2014.
Apart from earnings which have not picked up as expected, deterioration in the macro story seems to be acting as a big headwind for the sector, suggest experts.
“Smallcaps usually lead the rally in terms of gains in a bullish market scenario. The present correction which we are seeing is an overdue correction in prices. The rally actually halted since Q4 of FY 2018 where we have seen dull participation post then despite broader indices rallying almost 10 percent,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
“The current correction seems to be fair though given overall change in fundamentals we expect the buying to come in when there is another correction of 7-10 percent. At that point in time, we would surely see some value appearing in stocks and small and midcap index,” he said.
Movement of Midcap index in last 4 years:
Midcap stocks surged in 2014 after Prime Minister Narendra Modi assumed office in hopes of pro-growth reforms and a strong bounceback in economic growth.
As many as 38 companies have returned 100-600 percent in the last four years. These include Dalmia Bharat, IIFL Holdings, Natco Pharma, NBCC, TVS Motor Company, Page Industries, Biocon, Ashok Leyland, Rajesh Exports, and 3M India.
The BSE Midcap index, which nearly doubled since 2014, came under pressure in the last five months, weighed down by falling rupee versus the dollar, sharp selling by foreign institutional investors (FIIs) and market regulator Sebi’s reclassification of mutual fund schemes.
Since 2014, midcaps have faced three large round of corrections in January 2016, November 2016 and May 2017. Analysts advise investors to stick with companies which have done well rather than trying to catch the falling knife.
“I think the midcap companies that have done will continue to do well only if they support the earnings growth. As most of these companies are expensive therefore any decline in revenue growth would impact their stock price. Investors should look for companies which continue to show revenue and PAT growth,” Vinay Khattar, Head Edelweiss Investment Research told Moneycontrol.
“Investors should rejig their portfolio, only if the stocks are very expensive and valuations are ahead of their growth. PEG (price to earnings growth) which is a key indicator to determine the valuation should be looked at. Also look for sectors which are doing well like cement, metals, chemicals etc.,” he said.
Valuation-wise midcaps are still trading at premium valuations as compared to the largecaps. If investors are not ready to hold the stock for a long time of 3-4 years then they should exit from the winners which have given a multibagger return, suggest experts.
Movement of Crude oil:
The Narendra Modi government has been lucky on the monsoons and oil front in the first four years, but external sector risks will be testing it in the crucial fifth year, according to rating agency Crisil.
The fiscal and current account deficits (CAD) have also improved in the last few years, but there have been some reverses in the last year.Insight 18 | A Look At 4 Years Of Modi Government
Even though price rise has broadly been under check due to factors like good monsoons and low crude prices, the present scenario of a rise in crude could be a testing one.
The gross domestic product grew 7.3 percent in the last four years, which is slower than the 7.6 percent average clocked in the previous decade under the UPA regime, but there has been "visible improvement" on other macro indicators, Crisil's chief economist Dharmakirti Joshi said.
A raft of reforms and repair, disruptions, and slowing growth has also dominated the first four years. The government has pursued a "prudent policy stance" and there have been improvements in key macro indicators, the report by the research wing of the rating agency said.
Movement of Rupee:
Over the last four years, the rupee moved from Rs 58.72 against the dollar on May 26, 2014 to Rs 67.75/USD at as on May 25, 2018, implying a depreciation of around 15 percent in the last four years.
A fall in rupee usually dents FII flows. “A falling rupee dents FII’s dollar-denominated returns. FIIs typically hold their future investments in case they fear rupee to depreciate,” Alok Ranjan, Head of Research, Way2Wealth Brokers Pvt. Ltd told Moneycontrol.
“In the past, there have been several instances of currency depreciation eating away a good part of FIIs earning when they wanted to take some profits off the table. This makes them cautious if currency outlook is not conducive,” he said.
Abhishek Goenka of IFA Global says that USD-INR at 70 could be a new normal can be seen in early 2019. After breakout above 65.35 levels, we have seen that the USD-INR pair is convincingly trading above 2 std. deviation on a weekly basis.
"The pair can be seen moving further towards its all-time high of 68.90 by the end of this year and extension of the bullish leg beyond this level could take the pair higher towards 70 mark by the 1st quarter of 2019," he said.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.