Sanjeev Zarbade Kotak Securities
After a strong rally in 2017, global markets, including India, have taken a breather. While the global markets were concerned about rising trade friction and hardening bond yields, emerging market currencies came under pressure due to risk aversion towards safe assets like USD.
Crude prices also remained firm for most part of the year, which led to concerns on current account deficits of countries like India. With deteriorating macro-economic outlook, foreign investors were among the sellers, though markets held up well, thanks to support from domestic fund flows.
Mid and Smallcaps, the stars of 2017, underperformed in 2018 due to factors like earnings disappointment and increase in costs – material as well as interest. Additionally, sentiment turned cautious as there were instances of lapses in corporate governance in some of the midcaps, which led to tightening of surveillance measures by SEBI.
As we enter 2019, we expect macroeconomic conditions to be supportive of the market with 1) low inflation and possible rate cut in 1HCY19, (2) soft crude prices, and (3) continued strong GDP growth at 7.2 percent for FY2020.
Few global events/ factors that could impact domestic market in 2019 are:
1) Trade War: We note that further escalation in China-US trade issues may exacerbate the likely slowdown in global growth.
2) Fed Rate Hikes: The Fed is now looking to raise rates only twice in CY19. If Fed pauses on rate hikes somewhere in the first half of CY19 then it would provide a sigh of relief to emerging markets and India. Right now, the US Treasury bond yields have declined, signalling a slowdown in economic growth and less likelihood of steep rate hikes.
3) Crude: Crude prices have eased off in recent months, which is good for India’s economy. However, a reduction in Iran’s oil production/exports from May 2019 in the event of US removing its exemptions to eight oil-importing countries from Iran may result in global oil supply falling below demand, leading to higher global oil prices.
4) General Elections – The setback to the BJP in the three recent state elections in Chhattisgarh, Madhya Pradesh and Rajasthan has not shaken the market’s faith in the current BJP-led coalition government forming the next government too albeit with fewer seats for the BJP. Investors are comfortable with either a BJP/Congress led coalition government as reforms have continued during both the regimes.
5) Earnings – Our Institutional Equities research team estimates 14% and 27% growth in the net profits of the Nifty-50 Index for FY2019 and FY2020 respectively. If earnings are weaker than estimates (which has been the case for most of recent years), then markets can test lower levels.
Market View
Given the recent tailwinds coming from macros (i.e. lower crude prices, INR appreciation, strong RBI measures on liquidity front & possibility of rates cuts in the near future), we expect 10,000 to be the floor for Nifty. Valuations for the market at 16x FY20E appear reasonable especially when viewed against recent historical valuations (18-20X 12-month forward P/E).
We expect the Nifty to trade in 1,000 points range till the time of Central elections (i.e. between 10,500 & 11,500). Post elections, in case there is a fractured mandate then Nifty can go below 10,000 but should pull back and end the calendar year somewhere between 10,000 and 10,500.
In case we have a stable coalition government led by either BJP/Congress then we can expect Nifty to keep making new highs and it can go anywhere between 12,500 and 13,000 by end of Dec’19.
Risks to our view stem from tighter global monetary conditions, higher-than-expected crude oil prices and an escalation in China-US trade hostilities.
The author is VP – Fundamental Research at Kotak Securities.
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