After a roller-coaster ride in 2018, investors may have to sail through choppy market in the new year, as the global and domestic uncertainties could keep the Street on the edge.
However, most experts opine that the Indian market could offer 10-20 per cent returns in 2019. Most foreign and domestic brokerages have set their Sensex target in the range of 40,000-42,000 points.
“After a volatile 2018, on balance equities could be poised for better returns in 2019 with the caveat that the Indian electorate does not deliver a shock verdict in the forthcoming 2019 elections by delivering a fragmented coalition government,” says Morgan Stanley in a report.
The foreign brokerage house put the Sensex target at 42,000, an INR and USD upside of 20 per cent and 25 per cent compared to the MSCI EM Index USD upside of 7 per cent.
On the portfolio approach, Morgan Stanley said it likes GARP stocks among Banks, Discretionary Consumption and Industrials–both large- and mid-caps. “We are underweight Consumer Staples, Technology, Healthcare, Materials and Utilities. We are neutral on Energy and Telecoms,” it said.
BNP Paribas expects the Sensex to climb to 40,000 next year, implying a 10 per cent upside from current levels. The France-based investment bank, however, has a neutral stance on the Indian markets as the "earnings environment, unlike the macro-economy, hasn't revived yet". China, South Korea, Indonesia and Thailand are the Asian markets BNP Paribas is overweight on, while it has an underweight stance on Taiwan, Malaysia and the Philippines.
"A reason why we are not underweight India is the ease of stock selection. India still offers a wide range of good quality stocks across sectors consistently generating free cash and excess return," says Manishi Raychadhuri, BNP Paribas’ Asian equity strategist.
The brokerage finds India's price-to-book value (P/BV) expensive compared to Asian peers.
It says the drop in oil prices have eased the concerns of widening current account and a weak rupee, but there is no room for complacency on the oil front.
"...Given the unpredictability surrounding oil prices and its geopolitics-driven nature, complacency on this issue would be premature," says Raychaudhuri.
According to some analysts, notwithstanding global headwinds, the Nifty and the Bank Nifty are poised to see an upside of 15 per cent at around 12,500-plus for the Nifty and 12 per cent at around 30,900 levels for the Bank Nifty.
The reasons attributed are the global market downturn ahead of December 2018 by as much as 18-20 per cent in the US and more than 18 per cent in Europe. Relatively Indian and Brazilian markets are resilient.
Moreover, the third and fourth quarters are usually better for the Indian market post-monsoon. Also, this time, a strong recovery of bad debts by state-owned banks is expected.
Macro economic indicators like GST being in place, a wider tax base, infrastructure development, growth expectations and digital advantage are expected to aid company bottom lines.
Still, the market could remain volatile in the new year, as policy decisions will have a significant bearing on the market in an election year. However, the trend remains positive for the market on a yearly basis.
Though the trend in foreign investment is a concern, domestic investment is expected to offset any adverse impact from foreign flows. Foreign institutional investors invested Rs 5,981 crore in India's equity market in November and Rs 2,813 crore in December, but they net sold equities worth Rs 33,344 crore during the year and pulled out Rs 47,778 crore from the debt market (till December 26th.) On the other end, equity mutual funds saw inflows of Rs 1.06 lakh crore between January and November.
According to Kotak Securities, 2019 could be a happy new year. “We expect around 10-15 per cent returns from the Indian market in CY2019 on the back of (1) strong earnings growth, (2) possible modest de-rating of overall market multiples on global slowdown concerns and a potential de-rating of ‘quality’ stocks and (3) a broadly stable macro. However, we see potential risks from a global slowdown and China-US trade issues, oil prices and national elections. We favour a mix of ‘quality’ stocks in financials and IT services and ‘value’ stocks in other sectors.”
The brokerage said it sees earnings revival as the most important driver of the equity market in 2019 despite global and domestic events that may create volatility. It said India’s general elections in April-May 2019, testy China-US trade negotiations and Iran-US oil sanctions were events that could continue to cause market swings.
“We model net profits of the Nifty-50 Index to grow 27 per cent…driven by (1) robust growth in net profits of certain banks (both private and PSUs) on the back of lower loan-loss provisions, (2) strong growth in net profits of pharmaceutical companies driven by the launch of new US generics and specialty products and (3) moderate growth across domestic consumption sectors led by moderate GDP growth,” Kotak Securities said.
The brokerage also expects macroeconomic conditions to be supportive of the market in 2019, “with (1) low inflation (4.1 per cent average Consumer Price Index inflation for FY2020) and possible 50 bps rate cut in 1HCY19, (2) mild depreciation in the INR with manageable current account deficit (2.6 per cent of GDP for FY2020 at $72.5/barrel crude price) with possible downside risks and (3) continued strong GDP growth at 7.2 per cent for FY2020. We do note global risks stemming from tighter global monetary conditions, higher-than-expected crude oil prices and an escalation in China-US trade hostilities.”
The Indian arm of Japanese brokerage Nomura said it expects the economy to transition from a growth sweet spot in 2018 to a soft patch in 2019. “This should help to correct the macro imbalances, ease underlying inflationary pressures and open up some space for policy easing, but weak growth and political uncertainty will be a negative overhang in H1 2019. Elections in Q2 2019 should mark a turning point, as political stability and the lagged effects of lower commodity prices should enable a recovery towards end-2019,” it said.
Credit Suisse, a Swiss financial services firm, believes the expected slowdown in growth in the Indian economy will continue because of weak consumption but the pickup in investment activity seen in the last 18 months will continue through 2019. However, the market remains in favour of consumption, as reflected in the sector’s high price-to-earnings ratios. In contrast, industrial stocks have mostly not participated in the market re-rating over the past three years. This underperformance of the industrial sector and corporate banks is expected to reverse, it said.
Neelkanth Mishra, co-head of equity strategy, Asia Pacific & India equity strategist, Credit Suisse, said: “As monetary conditions are expected to tighten at a time when global growth is surprising negatively, volatility is likely to remain high in global markets in 2019. Indian equities would be affected too, particularly if equities globally see a compression in valuation multiples. However, the impact should be somewhat moderated, given that foreign investors have not been meaningful buyers of Indian stocks for the past three years and are now accounting for less than a third of trading volumes. Within the Indian market, our preference remains for the less expensive industrials stocks which are showing good earnings momentum; we fear the consumption-focused stocks are too expensive, and there is a risk of earnings cuts.”
Mustafa Nadeem, CEO, Epic Research, is positive on the Indian market, In a note on ‘Nifty outlook for 2019 and target”, he said, “Technically, to define the trend for market is simple; it is bullish. On a longer term timeframe we don’t believe there is any violation of the basic rules to call it a top that is impossible to breach. Though there is a cyclic component to this and that is related to macro events which generally precede a business cycle. Hence, for 2019, we believe there is a potential consolidation/correction that may be trailed with positive momentum. So, when moving forward, the volatility and corrections may be more often since we are heading into an event…We expect the range for market to be 11,600 to 9,400.”
Brokers feel investors can use volatile phase in the run-up to the Lok Sabha elections could be used as a period of adjustments, as the general elections, going back two decades, have had no visible impact on the market direction.