Sensex ends at record closing high! But stay cautious of these five risk factors

“It will be a tug of war between worsening macros and improving micros. The market’s course will be determined by a combination of external factors like oil prices, intensity of the global trade war, rate hikes in developed economies and internal factors like fiscal situation, earnings growth and investor expectations on the outcome of the general elections in 2019,” Rajesh Iyer, CEO, DHFL Pramerica Mutual Fund, said.

For Karvy Stock Broking, economic recovery and its impact on corporate earnings; political developments in India, especially upcoming state elections; ongoing resolution process of bad loans and recapitalisation of the banking sector; path of the dollar-rupee; and oil prices will drive market trajectory.

Here is a list of 5 factors that investors should keep a close eye on over the next 6-12 months:

Crude oil prices and fall in the rupee-dollar Crude oil retraced some gains after hitting a high of $80/barrel on account of geopolitical concerns and supply issues. It is currently at $74/bbl. Any price rise above $80/bbl could start weighing on the Indian market as the country imports almost 80 percent of its crude oil requirement. A higher crude oil price and depreciation in the rupee-dollar will constrain macros. The rupee has depreciated over 7 percent viz-a-viz the dollar in 2018.

“We have seen a dramatic rise in crude oil prices in the last couple of months due to geopolitical concerns. There are supply issues in Venezuela, Libya and Canada. The US has asked countries to cut imports of Iranian oil from November. On the other hand, the rupee has depreciated to an all-time low last month. It is expected to depreciate in coming sessions due to steady capital outflows and worsening macroeconomic conditions,” Rushabh Maru, Research Analyst at Anand Rathi Commodities, said.

Global trade war fears If the global trade war intensifies over the next six months, chances are that more than 2 economies will be fighting to save their home turf. Investors across the globe fear that an escalating US-China trade war could hit global growth and spoil investment sentiment. China accused the United States of bullying and warned it would hit back after the Trump administration threatened 10 percent tariffs on $200 billion of Chinese goods.

"The US-China trade war is something which is escalating further and traumatising equity markets worldwide. A new round of tariffs and verbal exchange between the head of states have sent a negative signal to global markets. This event will certainly cap the upside and weigh on the bullish sentiment that was seen in the domestic market in the last two days," Mustafa Nadeem, CEO, Epic Research, said.

Rate hike by the US and RBI A further tightening by the US will push liquidity from Indian equity markets, fear experts. The Reserve Bank of India last month hiked the repo or repurchase rate by 25 basis points: the first interest rate hike in four-and-a-half years.

“Credit flow into India is getting disturbed (as evident in the credit-deposit ratio currently at 74.7 percent) and is hurting money markets as demand for cash is more than money availability. The 10-year G-Sec may trade in the 7.75-8.25 percent range for most part of the next 12-18 months,” Anand Shah of BNP Paribas Mutual Fund India said.

He expects RBI to hike rates by 50 basis points in 2018. “State run lenders have gone soft on lending with most banks going under RBI’s Prompt Corrective Action framework. With core inflation moving higher, crude oil being elevated and trade wars looming over the horizon, we expect the central bank to hike rates by 50 bps.”

Earnings growth Investors are hoping for a double-digit earnings growth next fiscal. Any disappointment on that front could derail the rally and hurt investor sentiment. "As we commence the earnings journey of FY19, the overall picture appears brighter even as macros have deteriorated amid a volatile global trade environment. The confidence on earnings recovery is higher today than any time in the recent past," Motilal Oswal said in a recent note.

Outcome of state elections As things stand today, experts feel it is prudent to assume that the outcome of 2019 elections is not a given. They stated that it is safe to assume that there will be enough twists and turns in the next 12 months to keep market participants nervous. "Each opinion poll and every by-election result will be analysed endlessly to understand its implications for the 2019 elections," Harshad Patwardhan, CIO Equity at Edelweiss Mutual Fund, said.

Given these five factors, Shah of BNP Paribas Mutual Fund India feels there is no easy answers on the road ahead for equity markets. “When it comes to the next 6 months, we have 3 large state elections followed by general elections, rising crude prices and trade wars looming over the horizon. One should be expecting lots of volatility either ways," he stated.