From the Indian markets context, our view is 2018 is a year of consolidation (after breath-taking extended-honey-moon rally of 2017). We believe top priority of investors in 2018 should be capital preservation through efficient asset allocation (increasing allocation to largecaps, high quality midcaps, gold and hedging strategies).
On the equity front, the stock selection has to be spot on as markets have become quite unforgiving for stocks even with minor taint. Markets have been rewarding right stocks (backed by quality research and advice) quite generously, as smart money is eagerly chasing quality.
We are in the winner-takes-it-all market with top quality stocks getting top valuations; and markets are ignoring companies with doubtful credentials even though optically they appear to have low valuations. So, it is crucial for investors to take professional advice backed by research.
Indian political developments will keep the markets guessing about upcoming Lok Sabha election outcome, which is quite crucial as the very foundation of the 2014-2017 market rally was political stability. Investors can keep the buffer of dry powder ready, to take advantage of volatility around elections.
With the in-built volatility in the markets on the back of host of complex variables (oil price, bond yields, politics, elections, trade war), 2018 is turning out to be classic traders’ market (where trading is offering higher returns than buy-and-hold). Of course, with the underlying Indian potential, this scenario will change and the country will re-emerge as “investors paradise” (once variables unfold positively).
Further, Indian corporate financial health is apparently improving as the long-awaited earnings pick-up is unfolding with corporate profits to GDP ratio moving up to 3.10 per cent in FY18 and expected to reach 3.30 per cent in FY19E, from a multi-year low of 2.90 per cent in FY17. To put things in perspective, for the period between FY05 and FY17, this ratio was at an average of 5.30 per cent. If Indian corporate earnings can experience long-term mean-reversion to those levels at 5.30 per cent, robust earnings uptick can be expected.
Further, with major debt clean-up taking place, Indian corporate aggregate balance sheet is also getting healthier with BSE500 (ex-financials) debt/equity ratio slipping to lowest levels in two decades.
On a crucial note, if there is a repetition of positive political surprise in the ensuing Lok Sabha elections with a single party winning full majority, the current market correction is just a hiccup in the feast of wealth creation.
On balance, we believe we have more to be hopeful for than to be fearful, but admittedly the number/degree of ‘fear’ factors is increasing. At Centrum, we congratulate all those who are patiently navigating the current market volatility; and welcome those who missed participating in the wealth feast during 2014-2017.
Source: Centrum Wealth Research