Weaker oil prices, continued reforms, stable government and capital availability are the key drivers for Indian Markets in 2019
Ravi KatariaGlobally, economies, including developed and developing, haven’t seen completion of hawkish interest rate cycle and we are witnessing
signs of slowdown, if not recession.
The US markets, largely driven by technology, defence and services, are seeing continual correction and saturation of various technology backed sub-sectors including. The speed at which the correction comes will determine adjustment rate and a decline in equities for other major economies including India.
On the other hand, China has built huge manufacturing capacities (metals, intermediates, consumer goods) capable of creating dumping problems for India and other countries, especially if trade war situation is not resolved with the US. Our outlook for the Chinese economy remains cautiously positive largely due to cheap valuation that the equities offer in comparison to other fast-growing economies.
Indian markets have seen a marginal appreciation of 3 percent in 2018 backed largely by big counters whereas midcap and smallcap saw erosion in valuations.
However, reforms including insolvency and bankruptcy code, goods and service tax, and push for domestic manufacturing are expected to show results in the upcoming quarters. These should help in revival of valuations in MSME space owing to capacity and operating margin expansion due to economies of scale.
Declining prices of oil, and continued weak outlook of the commodity in 2019 gives a lot of headroom to India for targeting GDP growth rate of above 8 percent in H2 2019. We have given a price target of $55-60 in the medium to long term.
2019 ElectionsBefore the upcoming general elections, government at the centre has already announced a reduction in indirect taxes across consumer and
related items. This can trickle down further to construction and captive segments in the upcoming months.
Modi government is also planning for a full budget in 2019. An expectation of the second term is expected to provide relief in direct taxes. These measures should help in expansion in valuations of consumption backed stories in MSME and largecap.
The current measures will provide immediate relief to consumers, especially middle class, expectedly huge vote base for the government of the day.
A clear majority for Modi government in 2019 is a highly preferred option by the foreign as well as domestic institutional investors. An expected outcome should help in the revaluation of Nifty to 19x-21x as compared to forward estimates of 16x-18x. The revaluation alongside 19 percent growth in Nifty EPS (Rs 671 – IIG Estimates) high growth should help in broad market gains of around 21-24 percent in 2020 subject to no recession in any major economy.
The recent spike in oil prices alongside rising rates helped depreciation of the rupee and continued selling in equity markets. However, select FPIs saw cheaper valuations and rupee as buying opportunity and re-entry point. The availability of capital in form of debt and equity at lower expected rate will act as a major catalyst in expansion plans of fast-growing industries.
Deepening of debt markets and more capital from Europe and Southeast Asia can help in risk mitigation as well as expansion. Investment Imperative Group is planning to set up funds alongside Chinese and Indonesian investors to fund through equities, mezzanine, and prime debt.
We are long on PSU banks going into 2019 largely due to the implementation of IBC code helping in the clearing of non-performing assets. On the lending front, relaxation in norms for MSME lending would help in achieving diversified corporate lending book for the banks.
Consolidation of the banks (Bank of Baroda, Vijaya, Dena), clearance from PCA, recovery from previous lendings and high corporate growth are expected to boost asset quality and returns for the banks.
Auto and auto ancillaryAuto and ancillary will see a normalisation of growth in 2019. Companies banking huge on electric vehicles and batteries as well as those
engaged in setting up of infrastructure for charging stations, replacement of batteries and repairs and services are preferred over and above
The budget allocation for infrastructure is expected to see a marginal dip in FY19 as focus shifts on leaving more on the table for consumers. However, roads, waterways, and irrigation continue to offer prospects as well as valuations when considered slightly longer-term period (5-7 years). Any major rise in interest rates can substantially dent the profitability of companies in this space.
The companies in the sector saw some respite due to weakening rupee in the second half of 2018 after a tumultuous period of pricing pressure from central government and US regulations on generics.
The Indian government has negotiated with China for allowing of import of Indian generics. Firms focusing on volumes, brands will continue to see decent growth as against those focusing on high margin offerings.
The author is Founder and Managing Director of the Investment Imperative Group.Disclaimer: 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.