Here’s what to expect from the markets in 2019

Neha Dave
Moneycontrol Research

Highlights:
-In 2019, markets will be dictated by politics
-Choppier year ahead for global markets
-Earnings boost from softer commodities in India; oil remains a wild card
- Range-bound markets in near term with a downward bias, stay with defensive stocks
 -------------------------------------------------

For India equity investors, 2018 will go down as an unusually volatile year, with investors enduring not one, but two big corrections. The Nifty fell by at least 10 percent twice in 2018. First, after touching 11,000 levels in January and second after scaling a new high of 11,700 in August.

While the benchmark still remains in green year-to-date, it remains to be seen if it can manage to hold on to the current levels through the remainder of the year.

Heading into 2019, equities will continue to be volatile with a downward bias as political uncertainty is expected to hit a feverish pitch following today’s state elections outcome and as we move closer to general elections.

The renewed pessimism over earnings growth after a lacklustre Q2 FY19 and worries over faltering economic growth and fiscal slippage will keep markets on edge. The resignation of Reserve Bank of India Governor Urjit Patel will further create speculative pressures.

Against this backdrop, the most pertinent question on investors' mind is what can we expect in 2019? While it is difficult to indulge in crystal ball gazing, we look at the factors that will drive the markets in the near to medium term.

Global factors to induce further volatility
With more than half of all global equity market capitalisation being represented by US equity market, Indian equity markets will continue to track US markets. After a 10-year long bull run, the outlook for US equity is tentative amid doubts over US-China trade truce, threat of inverted yield curve and concerns over economic growth slowing down.

In 2018, US equity has been supported by strong earnings growth of around 21 percent and share buybacks powered by tax cuts. However, for next year, earnings growth is expected to significantly moderate in the absence of any incremental tax benefits and as margins come under pressure from tariffs, higher interest rates and rising input cost including wage inflation. For 2019, analysts project earnings growth for S&P 500 companies to fall to roughly 9 percent from a multi-year high of 21 percent in 2018 as per Factset.

In the medium term, US markets are likely to be held in check by simmering trade tensions and moderate earnings growth. Federal Reserve shying away from further tightening due to growth concerns could give new hope to both equity and bond markets in the US and across the globe, especially emerging markets.

Among domestic factors, elections not earnings to drive marketMost years have a dominant theme that shapes financial markets. In 2017, it was demonetisation and rollout of Goods & Service Tax (GST). In 2018, depreciating currency and idiosyncratic risks like funding concerns for non-banking financial companies (NBFCs) grabbed headlines and influenced markets. In 2019, we will see return of politics as a market driver.

Corporate India is expected to report mid-teens earnings growth in FY20. Margins for Indian companies are likely to get a boost from falling oil prices, which have declined more than 20 percent since September-end, as well as softer commodity prices on account of a subdued global growth outlook.

Theoretically, the potential growth premium will shift in favour of India as US earnings growth is expected to fall to single-digits in coming years. This should benefit Indian equities and attract flows. As we head in to general elections next year, political uncertainty will keep global investors on the sidelines.

While the market valuation has moderated, there are quite a few dark clouds looming around in the form of sluggish earnings growth, decline in rural consumption, risk of overshooting fiscal targets and last but not the least the political risk of an unstable government. Oil prices also remains a wild card. Given this scenario, we don’t see many triggers for a meaningful upside in markets in the near term. However, RBI taking a very long pause on the rate side would be the only silver lining amid the dark clouds.

Though the political events could fuel volatility, it would also lead to an opening up of opportunities in the market, which should be selectively capitalised by long term investors. We suggest investors focus on the fundamental picture, which is like a compass showing the right direction amid political noise. Since it is not 'a rising tide lifts all boats' kind of a market, investors could navigate turbulent times by being selective on defensive largecap names. Buy high quality stocks on dips for the long term should be the mantra in the next five months.

Follow @nehadave01

For more research articles, visit our Moneycontrol Research page