The positive turn in macro factors, a continued earnings recovery, and sustained liquidity are likely to help equities deliver double-digit returns in 2019, according to Navneet Munot, Chief Investment Officer, SBI Mutual Fund.
However, he noted, it will be a roller-coaster ride as intra-year volatility could be substantially high in the current calendar year.
In an interview to Moneycontrol, Munot said global factors and noise around general election will be a drag on the market performance, particularly in the first six months of 2019.
On expectations from the Union Budget on February 1, Munot said there is an increased chance of fiscal spending getting increasingly oriented toward revenue expenditure, given the outcomes of the recent state elections that accentuated the stress in the farm income and political compulsions.
He also expects some measures to boost the rural/farm income either in the form of loan waiver or income transfer.
ELECTIONS
Munot said a host of factors are likely to weigh on foreign and domestic investors’ appetite towards the Indian equity market, especially in the first half of 2019.
“Upcoming general election is one of them. In the longer-term, however, market returns, and political outcomes don’t have a strong correlation,” said Munot.
“Some of the key reforms introduced by the current government are the implementation of GST (Goods and Services Tax), Insolvency and Bankruptcy code, real estate regulation, implementation of Aadhaar and Direct Benefit Transfer. We expect these reform outcomes to continue irrespective of the party in power,” he added.
On likely market reaction in case election outcome does not show a clear winner, Munot said there may be a near-term unfavorable reaction but Indian economic growth and market returns show a very weak correlation with the political party in power.
EARNINGS
Munot said third-quarter earnings are likely to be lacklustre.
He noted the situation on the macro front has turned favourable over the last three months, with a sharp correction in crude oil prices, followed by a bounce-back in currency and moderation in 10-year G-sec yields.
However, the micro situation appears a tad weaker, given the slowdown in auto numbers, rising cost of funds and liquidity issues in the NBFC sector.
The asset manager said fiscal conditions have tightened due to lower-than-expected tax revenue collections leading to delay in disbursement of funds and can adversely impact the sectors dependent on government outlays.
The impact of rising raw material costs and rupee depreciation in the first half of FY19 are expected to be visible in the third quarter of FY19 earnings outcome of several sectors.
The banking sector though could report healthy earnings growth, led by an acceleration in credit growth, improving asset quality trends, and an improvement in treasury gains.
Capital goods will have another healthy quarter, while information technology is likely to post the fourth straight quarter of double-digit profit growth, according to Munot.
He, however, said NBFCs may face a significant deceleration in profit growth but still post a respectable double-digit number.
INVESTMENT CYCLE PICK-UP
A pick-up in the investment cycle is likely in the current calendar year. Munot said, “Drivers of capital spending now looks a tad better, while the drivers of consumption are a tad worse (at least not better). Utilizations have increased for airports, power, cement, oil refineries, chemicals, textiles, steel, capital goods, and autos.”
He said corporates are better placed to undertake capital spend with improved leverage and interest coverage ratios and banks too are in a better shape to lend.
Select sectors such as automobiles, cement, chemicals, hotels, oil & gas (particularly gas) and steel should lead the cycle.
Unlike the last cycle, power generation may not be the big driver, Munot said. Additionally, the thrust for housing demand still seems amiss and the challenges in the NBFC sector may impact SMEs.
SECTOR VIEW
The improvement prospect for private sector investment augurs well for the industrials sector which has underperformed the overall market so far, Munot said.
Capex recovery along with NPA resolutions should help corporate banks to continue to out-perform.
Barring select players, Munot said, NBFC’s will face pressure on margins and growth. Given the rich valuations and the ebbing tailwinds, consumer stocks may lose sheen, the CIO added.
The fund house which was upbeat on rural consumption two years ago is now running an underweight position on the sector because of government’s limited success in improving the farm income.
Also, low food inflation, while positive for urban consumers, has adversely affected the farmers’ income.
CRUDE OIL, RUPEE
Crude oil (Brent) had touched the highs of $85 a barrel and corrected nearly ~30 percent since, following the about-face by the US on Iranian oil export sanctions in November.
Munot said there are a host of factors that lead to an uncertainty in the crude oil price particularly around a) how much oil will Iran export this year b) how aggressive will OPEC be in its production cuts agenda, and c) uncertainty over Chinese growth and hence overall EM demand.
SBI Mutual Fund expects better clarity on these factors by the middle of the year and hence better clarity on the crude price outlook.
Today, International Brent crude oil futures were trading at $61.17 a barrel, up three cents from their last settlement, having closed down 0.6 percent in the previous session.
Munot expects rupee to be stable around 70-72 per dollar in the near-term barring any unexpected event shocks and then gradually gyrate towards 74 levels by FY20 end.
RBI RATE ACTION
According to Munot, current inflation dynamics are benign, and inflation is expected to remain comfortable for the next couple of months.
Though, he expects food prices will bottom out and overall inflation will inch closer to 5 percent by year-end.
Recent economic activities have moderated and external account dynamics such as crude prices and rupee have turned favourable. These factors open the possibility of change in policy stance and a rate cut in the February policy itself, as per Munot.
However, uncertainty over fiscal stimulus appears to be the only hurdle in front of monetary easing and better clarity will emerge post union budget (vote on account).
ADVICE FOR INVESTORS
While markets will exhibit higher volatility this year due to global and domestic factors, particularly general elections, Munot advises investors to not get swayed by the volatility.
“They need to remain disciplined and continue the focus on asset allocation with regular re-balancing. Longer term orientation is critical to achieving their financial goals,” Munot said.
The assets under management of SBI Mutual Fund stood at Rs 264,353 in Oct-Dec quarter, up 4.15 percent from Jul-Sep.
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