Fast Forward
The new year brings hope. FC talks to experts to get clues on the best way to grow your money

Investors can brace for a sharp bumpy ride ahead in 2019 as the equity market faces strong global and domestic headwinds. From low levels of volatility seen in 2017 when everybody started assuming equity markets are linear in nature, volatility came back with a bang in the past year. And now with crucial global and domestic events, particularly the general elections of 2019 up ahead, the market is on a roller-coaster ride.

There are a slew of events that could keep the market on edge in 2019.

Global event

The big global event to watch out is the trade war between the US and China, with the former imposing tariffs on China under the pretext of correcting its huge trade deficit and the latter retaliating with similar measures, also pose a challenge for the bulls.

The apparent fall in popularity of the ruling government, as indicated by the loss in the state elections of Karnataka, Chhattisgarh, Madhya Pradesh and Rajasthan, also cast some doubts over the likely outcome of the 2019 general elections and consequently the fate of reforms and policy continuity.

However, despite all the above challenges for the bulls, the Indian stock market in 2018 not just outperformed its global peers (by 16 per cent) but ended the year with modest gains of 2-5 per cent. Notably, global stock market indices lost between 3-24 per cent with the developed markets losing an average of ~13 per cent while the other emerging markets (ex-India) too lost an average of ~13 per cent.

In fact, 2018 saw a resurgence of domestic investors participating through the Mutual Fund route into the stock market as monthly inflows in the form of SIPs at Rs 8,000 crore is up by 30 per cent compared to about one year ago and nearly double since a couple of years back. This helped MFs to emerge as net buyers in Indian equity to the tune of Rs 1.1 lakh crore in 2018 compared to a net-sell of Rs 24,000 crore by the FIIs.

According to analysts, going forward, notwithstanding the short-term disturbances, this trend of improving domestic flows will continue to act as a cushion for the Indian stock market.

For the coming year, it is expected that the markets will face heavy headwinds that could hamper plain sailing throughout the year. Experts feel that there is a cyclic nature to the volatility but this tends to erode major economic or macro-economic events and a much bigger cycle takes the front seat. In the past there was heightened volatility usually two months prior to elections but this calms down post election as the dust settles.

Volatility

“Hence any short term or medium term investor should avoid investing with short term or medium term perspective, as; volatility may hurt the overall returns. The important point here is that post election as it settles down the long term trend remains intact and the overall bullish nature of the market unfolds itself for long term investors,” says Mustafa Nadeem, CEO, Epic Research.

“We believe the market is likely to be in consolidation going forward with some correction that can bring down the valuations to a cheaper level. Risk aversion will be the flavor, he added.

The favourable factor this year end and is the appreciation in the rupee. The rupee has appreciated almost 7 per cent in the last few weeks while crude has dropped almost 44 per cent from its recent peak. This will have significant impact on CAD. Against the backdrop of this perspective, the equation seems to be positive for the long term.

For a short term perspective, the market is expected to be in range with upside capped at 12,000 while on downside it has support placed at 9,450. Analysts feel that many things are looking to work out in favour of the Indian economy in the medium-to-long-term view. So any decline from the current level, which is more than 10 per cent, should be utilised by investors to add quality stocks with growth potential. Once the volatility ends, one should keep the investment horizon for the longer term.

Investors for 2019 should understand that any dip is useful when it is more than 10 per cent in a secular bullish market. This helps to bring costs lower and pyramid the portfolio for better returns. “As far as timing is concerned, post June we expect smoothness due to easing of volatility and pick up in investment cycle. It all comes down to the mandate of the people in LS 2019 as well. The road ahead for Nifty/Sensex in 2019 seems to be accommodating volatility which has been cyclically down for the last couple of years. Volatility has been the curse for 2018 as the year started with its expansion and since then we have seen Nifty volatility expanding in a gradual manner, up 68 per cent in the last few weeks,” says Nadeem of Epic Research.

He notes that crude is around $42 – that is below the $50 mark – which is a boon for the Indian economy. “We will see bulls try to make their way out of it. For Nifty, the range seems to be 12,100 on the upside to 9,400 on the downside. Sensex, on the other hand, may oscillate between 39,800 and 32,300,” he observes.

A volatile market brings a lot of pain but it could offer great opportunities to construct a long-term portfolio. Any major market move hinges on earnings growth. “As valuations are more likely to trend towards the long-term average which is lower than the current market valuations, earnings will hold the key for generating market returns. Stock picking and portfolio construction should be based on sectors which are likely to deliver strong earnings growth but are also backed by reasonable valuations. Thus, from a top-down sector allocation perspective, banking and IT are likely to record strong earnings growth over the next one year,” say analysts with a leading domestic brokerage said.

However, most experts are of the view that the Indian market could offer 10-20 per cent returns in 2019. Most foreign and domestic brokerages have set their Sensex target range from 40,000-42,000.

“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 its report.

The foreign brokerage house put Sensex target at 42,000, an the rupee and US dollar upside of 20 per cent and 25 per cent. On the portfolio approach it says, “We like 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 telecom.”

Meanwhile, BNP Paribas expects the benchmark 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 is of the view that India's price-to-book value (P/BV) is expensive.

Mid-caps and small-caps deliver solid long-term returns if accumulated at the right time and right prices. Focus for mid-caps should be on margin sustainability and return ratios like return on equity (ROE). As the mid-cap and small-cap market has seen solid correction, there are opportunities in the space to accumulate quality mid-cap stocks. Typically, consumer sector presents with good return ratios and high growth, but valuations could be a challenge but still there are opportunities in stocks like Voltas, Finolex Industries and many others which trade at reasonable valuations and provide good long-term growth opportunities.

As the macro concerns have eased with lower crude prices and CPI inflation at multi-month lows along with stable rupee and softer bond yields, interest rate cuts in CY19 from current levels seems more likely. The reduction in interest rate will help for the manufacturing sector like capital goods, auto and metals wherein lot of new capacities have been added over the past few years utilisation levels will improve aiding higher profits over the next few quarters, it would warrant for higher multiples.

Market volatility confuses investors often about the direction of the market. Thus, take time to build portfolio. Allocate when markets are spooked and buy high quality large-caps when the markets look the most stressed. Accumulate mid-caps with more study about the fundamentals. Allocation of 60 per cent to large caps while 40 per cent to mid-cap and small-cap for a risk neutral investor with no immediate cash requirements is advisable. For a risk averse investor, investing 80-85 per cent in large-cap stocks and 15-16 per cent in mid-caps is a good framework to build a portfolio for 2019.

Going ahead, markets are likely to remain volatile in the first half of the year with global slowdown and general elections year. However, we believe volatility will give a chance to build the portfolio over the next two quarters to generate higher double digit returns for the next few years. One should start investing through the SIP routes for better cost of averaging over the next five months. Valuations will be below the median average at 14.8 times CY19 earnings (currently 15.9 CY19 earnings). We will be very comfortable if we correct by 7-10% from current levels which will provide an opportunity to invest lump sum into individual stocks and sectors.

Columnist: 
Ashwin J Punnen