The market has been highly volatile in 2018 amid global and domestic factors, with the Sensex rising 6.5 percent so far and Nifty 3.4 percent. Oil price movements and rupee volatility, US-China trade tensions, IL&FS-led liquidity crisis in NBFC segment, and long term capital gains tax imposition in Union Budget were some of the factors that moved market this year.
The same trend is likely to continue in 2019 as well amid likely slowing of global growth and tightening monetary conditions; general elections in India is also a key event to watch for, experts said.
"As monetary conditions are expected to tighten at a time when global growth is surprising negatively, volatility is likely to remain high in global markets in 2019," Neelkanth Mishra, Co-Head of Equity Strategy, Asia Pacific & India Equity Strategist at Credit Suisse said.
After two years of relative stability, global growth forecasts are being cut again. While Japan and the European Union are slowing, too, the steepest cuts are expected in the US. Concerns around investment growth in China are also continuing.
On Tuesday, Japan's government lowered its forecasts for economic growth and consumer prices for the current and next fiscal years as natural disasters and weakening export demand weighed on the economy. The economy will grow 0.9 percent in 2018 against its previous projection of 1.5 percent growth, and in 2019, too, the economy will expand 1.3 percent against the previous forecast of 1.5 percent growth.
Recently, even top IMF economist predicted slowdown in the United States, the world's largest economy. "We have long been predicting somewhat lower (US) growth for 2019 than what we are seeing this year," as the effects of the Trump administration's fiscal and budgetary measures begin to fade, IMF chief economist Maurice Obstfeld said in an interview with the Wall Street Journal and the Financial Times.
The IMF has already revised downward its 2019 growth prediction for the US to 2.5 percent from the 2.8 percent expected for this year.
Mishra said Indian equities would be affected, too, particularly if equities globally see a compression in valuation multiples. However, the impact should be somewhat moderated given that foreign investors have not been meaningful buyers of Indian stocks for the past three years and are now accounting for less than a third of trading volumes compared to nearly 50 percent a few years back.
The premium of India's valuation multiples to that of global equities is already near an eight-year high.
Credit Suisse expects some slowdown in India in the first half of 2019 due to low credit availability (which is a concern for consumption and growth), though the headwinds from higher oil price and higher interest rates have eased.
The upcoming Lok Sabha elections will also induce some volatility as expectations of BJP forming a majority government at the Centre diminish.
Many considered the recently concluded five states elections as the semi-final before the general elections 2019 believing that these elections show trends that could determine the next ruling party at the Centre.
Yes, there could be volatility as the noise levels should stay in the run up to the upcoming elections in April to May 2019, but general elections going back to two decades have had no visible impact on market direction, Credit Suisse said, adding investors may be concerned only about change in policies if any after Lok Sabha polls.
"Weak agricultural incomes are likely to remain a source of distress for 200 million plus workers for several years, driving political change as well as policy experimentation, the ensuing uncertainty may be a concern for investors," it explained.
Hence, the global investment firm prefers investment-related stocks (due to likely continuity in public capex growth) over consumption focussed stocks for India in 2019.
"Improving relative P/E as markets gain confidence in the investment cycle sustaining should drive significant outperformance. This should help corporate banks (clean-up of past problems nearly done, better pricing power, cheap compared to retail private banks). Consumption, on other hand, remains over-priced with a risk of EPS cuts," it reasoned.
Credit Suisse increased its industrial overweight by adding 2 percentage point from metals and stayed underweight on consumption.
Here are its top four picks for 2019:
Larsen & Toubro: Outperform | Target: Rs 1,700 | Return: 21%
The research house reiterated its outperform rating based on domestic pick-up, lower Middle East dependence (only 6 percent of total orders in first half of FY19), strong cash flows, upside from divestiture and valuation at around 16x September 2020 estimates EPC earnings.
Upside surprise is likely from better margins on strong execution, opportunities from budding private investment cycle and lower losses from Hyderabad Metro in FY20/21E.
BHEL: Outperform | Target: Rs 100 | Return: 48%
BHEL would have a sustainable opportunity of more than 10 GW per annum. This level of execution can drive sharp EPS recovery and rerating.
The company has tremendous operating leverage, given 42 percent contribution margin on incremental revenues on low base. Target price implies a multipleof 6x EV/EBITDA on FY21E EBITDA and around 1x book.
Key risk relates to the time taken for positive power sector dynamics to strengthen and get broadly recognised. Weak orders in any year, particularly in the near term, could affect sentiment. Large working capital exposure is a risk.
State Bank of India: Outperform | Target: Rs 350 | Return: 21%
Post several quarters of muted growth, SBI has seen a pick-up in loan growth over the past few quarters.
Post several years of asset quality stress, the research house expects slippages to moderate in the coming quarters, credit costs should normalise in FY20.
The bank would see strong recoveries in second half on account of a couple of large cases.
With stock trading at around 0.9x FY20E core P/B and return on equity expected to improve to around 13 percent as credit costs moderate, the research house maintained outperform call.
ICICI Bank: Outperform | Target: Rs 375 | Return: 5%
The bank has seen an improvement in operating performance, with loan growth picking up in Q2FY19 driven by strong growth in domestic loans.
With slippages moderating and recoveries from IBC cases, reported NPAs declined in first half of FY19 and would likely decline further over the coming quarters.
Given the strong capital position as growth picks up and credit costs normalise, return on equity should improve to over 14 percent by FY20E. With the stock trading at 1.5x core FY20E P/B, the research house maintained outperform rating.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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