Jyoti Roy of Angel Broking said a favourable outcome of the general elections could lead to multiple expansions which can push the Sensex closer to euphoric levels of around 45,000 by the year-end.
2018 was probably the worst year for Indian equities after 2013. Concerns were many, including rising global and Indian bond yields, receding global liquidity, high crude prices, tight liquidity situation and a depreciating rupee. It was recipe for a perfect storm. The IL&FS crisis broke the back of Indian equities which went into a free fall from the third week of September.
The BSE Sensex fell around 15 percent from 38,990 on the August 29, 2018 to around 33,291 on October 26, 2018.
However, macros have since then swung in favour of India led by falling crude prices and a change of stance at the RBI. The central bank also lowered its inflation projections over the next one year by over 100 bps which opens up room for rate cuts down the line. Crude prices falling from $85 a barrel to below $60 a barrel is a big macro positive for India.
With change of guard at the RBI, there has been a step up in liquidity injection as the RBI has announced OMOs (open market operations) to the extent of Rs 50,000 crore in December 2018 and January 2019 which can extend up to March 2019.
G-sec yields have now fallen to 7.3 percent from 8.2 percent at the peak of the NBFC crisis. Liquidity injection is expected to bring about stability in the financial markets especially in the NBFC sector which had been under pressure post the IL&FS crisis.
The US FOMC dot plots now point to two rate hikes in 2019 from earlier three hikes. However, with the spread between the US 2-year and 10-year G-sec yields collapsing to around 20 bps, markets are factoring in just one or no rate hike next year.
We believe that a whole host of macro positive factors are yet to be priced in fully by the markets. Earnings are expected to rebound strongly from Q3FY19 led by corporate banks. A pro-growth government and a significantly more dovish (than usual) RBI would also provide upside to earnings growth. While populist measures are expected to announce in the run up to the elections and there could be some fiscal slippage markets would most likely ignore it.
We are positive on the markets in the run up to the Union Budget as the positives get factored in, post which, there could be some amount of volatility closer to the general elections which will provide us with a good entry point into the markets.
Irrespective of the outcome of the elections, we feel that earnings growth would accelerate in 2019. A favourable outcome of the general elections could lead to multiple expansions which can push the Sensex closer to euphoric levels of around 45,000 by the year end.
On the other hand, an unfavorable outcome of the general election could depress markets for a few months.
Post that, markets will take cognizance of improving fundamentals and the rally would be back-ended. Even then, we expect markets to easily scale previous all-time high of 38,990 by the end of the year.Disclaimer: The author is Deputy Vice President, Angel Broking. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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