Globally, the overarching themes would be trade war and its outcome, rate increase/monetary tightening and geopolitical stability, while in India, health of its financial system, the outcome of general elections and the confidence that the new government instills in the minds of global and local investors will remain important, Dhiraj Relli, MD & CEO at HDFC Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: Will 2019 be a better year than 2018 for India equities?
A: Investors would not be bereft to see 2018 come to a close. This is largely owing to the fact that the year has not been kind to the investing community with regard to wealth creation, despite the Nifty growing 3 percent.
This can be attributed to a number of factors. For one, there has been a definite shift in FII inflows from the Indian to the overseas markets. This has taken place because of lacklustre corporate earnings growth in the country, and also, rising interest rates overseas following the US Fed Reserve and other global central banks increasing rates during the course of the year.
Other factors that dampened sentiment in 2018 were actions taken by the regulators which though necessary, have led to the narrowing of the markets. In addition, some companies had to deal with corporate governance issues.
However, we believe that 2019 will paint a different picture. That is, despite the clatter and hype expected in the run-up to the elections, the India growth story will stand strong.
Factors in our favour include demographic parameters as in a young working populace, an independent and evolving judiciary, and increased awareness among voters regarding their rights (and hopefully their responsibilities, too). Additionally, elected leaders at both the Centre and state levels are becoming increasingly responsive to the fast-changing need of the hour (although they may still keep slipping into the populist mode every now and then).
The base for second half of FY19 is high, and hence the possibility of earnings disappointment arises in that period. This period will coincide with the general elections, and is expected to result in substantial market volatility.
Nifty has the potential to touch 12,400 during CY2019. This is based on various factors, namely the expectations of an earnings pick-up in Indian corporates post Q4FY19, and the resumption of FII inflows to the Indian markets around and post the general elections. Mutual fund inflows to the domestic markets are also on a structural up move, driven by greater financialisation of savings.
A softening stance (including a probable rate cut) by the Reserve Bank of India (RBI) in early 2019 could help valuations. Additionally, the participation of large-caps could be greater than what was witnessed in 2018. Mid-and small-caps may also perform better in 2019, following a poor run in 2018.
However, there are key risks to our optimistic outlook for 2019. They include the continuation of trade tiffs, resumption of the rise in crude oil prices, continuation of rate hikes by the US Fed Reserve, and an unstable outcome of the general elections in the country.
Q: Crude prices have stabilised after the recent crash amid global growth concerns and oversupply. Will this prove to be a game changer for India?
A: A $10 a barrel change in crude oil prices results in around 50 bps impact on CAD/GDP; around 30 bps impact on inflation; and modest impact on fiscal deficit through higher subsidies on kerosene and LPG.
Hence, as far as Indian macro is concerned, falling or low crude prices are welcome. We, however, feel that if low crude prices are in anticipation of low global growth, then it will impact India’s economy in other ways and in turn adversely impact corporate earnings growth (which anyway will be impacted initially due to high cost inventories on account of old crude bought at high prices).
Low inflation (3-5 percent) in a country like India is good to spur economic growth.
While in the past, Nifty moves have been observed to be inversely proportional to crude prices, over the last 3 odd months this inverse relation is no longer valid due to other domestic issues coming to the fore. Hence, if interest rates globally start to fall and/or domestic political situation stabilizes, Nifty could again be seen moving inversely with crude prices.
Q: Analysts expect the Fed to go slow on rate hikes in 2019 given likely uncertainty over US economic growth. What are your expectations?
A: India is delinked from global growth to an extent due to its lower dependence on external trade. However, India could get impacted indirectly by global slowdown, especially if it is led by China (whether due to the US China trade war or China’s own internal issues). In such a case, other emerging economies may face the risk of collateral damage and here India, too, would get impacted (though not to the extent of some other emerging economies).
On the other hand, continued strengthening of the US economy would prompt US Fed to keep raising interest rates which again would not be good news for India and other emerging economies. India is decoupled to some extent from the global growth slowdown but depending on the gravity of the slowdown, it may get dragged more into it.
Q: What will be your call on the market if BJP fails to come to power in 2019?
A: Going by the small margin of victories in MP and Rajasthan, no clear trend can be extrapolated for either the BJP or the Congress for the 2019 general elections as of now.
Any amount of political instability post the general elections would be detrimental to the equity markets especially if the global attraction towards emerging markets is on the wane due to rising rates or global slowdown.
In the past, India's economy and equity markets have fared well even under coalition governments, as from 1989 to 2014 no one party had a majority in the Loksabha. However if the global scenario worsens and local issues need strong willed decisions, we are not sure as to what extent a coalition Govt will instill confidence in investors both local and global.
Q: Analysts expect the farm loan waivers to be bad for long term but good in the short term. Should investors be cautious due to populist measures?
A: Post the state election outcomes, there is an increased risk of populist measures, as such promises seem to have resulted in a political dividend in these state elections. Given the precarious fiscal situation at the state level, many of these announcements will remain partly implemented leaving a bad taste for the target population while instilling fear among the global investors.
One hopes that sanity prevails upon the national parties to desist from such practices either voluntarily or under pressure from the election commission or judiciary. Issues plaguing the agriculture sector need wide ranging solutions and not just farm loan waiver.
Q: What would be the overarching theme globally in 2019?
A: We think globally trade war and its outcome, rate increase/monetary tightening and geopolitical stability will remain key themes in 2019. In India, health of its financial system, the outcome of general elections and the confidence that the new Govt instills in the minds of global and local investors will remain important.
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