We expect the market to witness sideways movement in the first half of 2019 and take a remarkable leap in the second half with emerging clarity over political landscape and sustained low oil prices and soft headline inflation
Indian equities witnessed a mixed trend in 2018, which includes issues pertaining to a global trade war and oil prices that remained at the centrestage throughout the year.
The market saw a sharp sell-off during September-October 2018 on the back of IL&FS fiasco and lingering liquidity crisis in the financial sector but managed to gain some lost ground later to end marginally positive.
The Nifty and the Sensex gained 3.2 percent and 5.9 percent, respectively in 2018. However, Indian equities shed a whopping Rs 7.2 lakh crore in market-cap during 2018, indicating that outperformance was mainly led by select largecaps.
There was a massive erosion of value among mid-cap and small-cap stocks. The Nifty Midcap and Smallcap indices plunged over 16 percent and 30 percent, respectively.
Domestic institutional investors (DIIs) continue to remain the backbone of Indian equities that infused over Rs 1.1 lakh crore in 2018 (DIIs invested Rs 1.17 lakh crore in 2017), as compared to FPIs that were net sellers in 2018 to a tune of $4.5 billion.
All eyes on politics, capex and interest rates
Going ahead, the equity market will remain volatile ahead of the general election in the first half of 2019.The market will look forward to three things in 2019 –
a) a stable government with a clear majority should be voted to power,
b) recovery in private capex cycle and,
c) reversal in interest rate scenario led by lower inflation and oil prices.
A strong government at the centre will see a re-rating in the Indian equity market. Until elections, the market will remain rangebound and take cues from the global market and the corporate performance of India Inc.
Notably, moderate GDP growth in the first half of FY2019, double-digit growth in gross fixed capital formation (GFCF) and decent growth in bank credit along with improving capacity utilisation across the manufacturing sectors (already surpassing 70 percent) make a case of likely revival in private capex cycle from 2019 onwards.
The revival of private capex cycle is utmost important to support corporate earnings trajectory, as populist measures ahead of the election may apparently leave the government with a paucity of funds for incremental public spending.
Moreover, likely slowdown in the global growth led by trade war and persistent increase in oil stockpiles in the USA may keep the oil prices low and aid in keeping inflation, especially CPI under the Reserve Bank of India’s (RBI) reference range.
Thus, reduction in interest rate cannot be ruled out, and we expect key policy rates to be cut if not in February 2019 then in April 2019 for sure.
Interest rate reversal is likely once again which could drive the performance of NBFC companies and infrastructure players.
We firmly believe stable rupee, twin deficits, concerns over corporate earnings growth in the US and dovish stance of the US Federal Reserve are likely to propel FPIs to infuse more into Indian equities and bonds in 2019.
Hence, unlike 2018, the FPIs are likely to be the net buyer in 2019 extending support to the Indian rupee and Indian equities.
Market to remain volatile in 2019
In nutshell, we expect the market to witness sideways movement in the first half of 2019 and take a remarkable leap in the second half with emerging clarity over political landscape and sustained low oil prices and soft headline inflation.
We advise investors to invest in quality stocks, where the valuations are either comfortable or trading lower with the historical average. There are many quality counters in midcap and smallcap space, which offer healthy risk-reward proposition after a sharp correction in 2018.
Take time to build your portfolio
We continue to believe that it is not a runaway market and investors should do a systematic investment plan or a SIPs and gradually increase their exposure to equities.
Market volatility confuses investors often about the direction of the market. Thus, take the time to build your portfolio. Allocate when markets are spooked and buy high-quality largecaps when the markets look the most stressed.
Accumulate midcaps after studying the fundamentals. Allocation of 60 percent to largecaps while 40 percent to midcap and smallcap for a risk-neutral investor with no immediate cash requirements is advisable.
For a risk-averse investor, investing 80-85 percent in largecap stocks and 15 percent in midcaps is a good framework to build a portfolio for 2019.
The author is ED & CEO, Reliance Securities Ltd.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.You can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.