Anand ShahBNP Paribas Asset Management India
The year 2018 was more or less in line with our expectations. The micro level economy did recover from the GST implementation and demonetisation led shocks, consumption recovered and government spending accelerated.
But, at the same time, India's macroeconomic variables deteriorated marginally from the unsustainable good levels that they were in 2017. In 2018, equity markets were volatile as expected.
But a sharp correction in mid and small cap companies did surprise us. Interest rates too moved up as expected and the 10-year government bond yield reached 8 percent as we had envisaged.
However, what was disappointing was slower than expected recovery in earnings growth. While the topline growth was in line, profit growth continues to disappoint compared to the expectations.
We believe CY 2019 will be a tale of two halves.
While the first half of CY 2019 will have multiple events which will keep markets more focused on macro variables. We believe the second half will see micros take centre stage, making stock selection the key for outperformance both in equity and fixed income portfolios.
In our view, the first half will have four key events, among many, to watch out for:
1. The US Federal Reserve monetary policy stance: Mainly the pace at which rates are being hiked (two rate hikes indicated as per latest Fed meeting outcome) and the pace of balance sheet unwinding
2. The US-China led trade war could have a bearing on large (as well as related smaller) economies - hurting their competitiveness, capital allocation, resources and economies of scale
3. Crude prices: With OPEC+ production cut and slower demand growth globally, we might find some stable levels for crude which could help market participants and businesses to make smarter decisions
4. The upcoming general elections in India will decide which party and ideology gets a mandate to lead India for the next five years.
Amidst the uncertainty, the underlying economy continues to be in a recovery mode. Over the last four years, many framework reforms that were implemented may have disrupted the economy in the short term. But we believe in the longer term these will aid the economy to deliver stronger and sustainable growth.
India's consumption story has recovered from the demonetisation led shock and we believe it will continue to drive micro level growth for the economy, along with a continued thrust from the governments (both state and central) on infrastructure.
In the second half of 2019, post the general elections, we believe the focus will be back on fundamentals. The second half could be all about stock selection wherein the state of the global economy, stable crude prices and the economic policies of the next government could emerge as key variables.
In such a scenario, we may have to identify sectors and companies which can sustainably grow earnings at a superior rate over the next few years. Similarly, in fixed income, calls may have to be taken on the duration and credits that could deliver the maximum risk/reward at that point of the time.
Equity markets are poised to do fairly well amidst the volatility. Given that it's going to be an election year, we cannot wish away the volatility. However, we believe the earnings recovery, albeit delayed, will take centre stage post the elections.
We continue to like consumer-facing companies given their capacity for superior growth, positive cash flows, minimal leverage and substantial moat.
Banking, especially corporate banks, could provide profitable growth as their asset quality improves, while the retail lending opportunity could provide future growth and fee income opportunities.
Infrastructure, unlike the last few years, may see some traction and thus should provide select opportunities for stock picking. However, we believe exports recovery will continue to remain choppy amidst non-tariff barriers and slower global growth.
On the fixed income front, benign inflation, lower crude prices, dovish US Federal commentary and an expected change in policy stance to neutral, bodes well for growth and fiscal balance.
This, supported by the liquidity easing measures (OMOs) and government maintaining its fiscal deficit target, should keep the benchmark bond yield in the trading range of 7.10 percent to 7.40 percent, albeit the direction of oil price would determine if there is a risk to our call.
Thus, to summarize, while the first half is expected to be ‘macro over micro’, the second half is expected to be ‘micro over macro’.
Indian investors, we believe, will continue (and should continue) to increase their savings allocations to financial assets, as they move away from real estate and gold, given soft inflation, high real rates and a relatively stable currency.
In our view it's time to tighten the seat belt to withstand the volatility in the first half of the year to enjoy the earnings recovery ride in the second half of 2019 and beyond.
The author is Head - Investments and Deputy CEO at BNP Paribas Asset Management India Pvt Ltd.
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