2018 was an interesting year for the markets. There were some predictable surprises as well as some unpredictable surprises, which made the markets quite volatile compared to the remarkable run of 2017. The low returns on equities was on expected lines as the year began with the market being overvalued, especially in the small and mid cap space.
The introduction of long-term capital gains tax (LTCG) on equities, crude oil and rupee volatility, state elections, US-China trade war, liquidity crisis in NBFC’s, negative FII (Foreign Institutional Investors) flows and global slowdown due to tight liquidity, all contributed to keep the markets on its heels. It was a tough year to make money in the markets.
So what will the year 2019 be like? To be honest, no one knows. There will be some unpredictable surprises that will keep us off guard. The good thing for equity investors this year is that the starting valuations seem to be more reasonable than what they were the same time last year. It will be a good year to accummulate equities if one is underweight on this asset class. I believe this year we might see even greater volatility in the markets than last year. Some of the issues that plagued us last year such as trade wars and oil and rupee volatility will continue to create uncertainty for the markets.
General elections in the first half of the year will likely keep the markets volatile. This can offer good entry points into the markets and investors should take advantage of the higher volatility. Systematic Investment Plans (SIP) in equity funds is a disciplined method to benefit from this. But the most important thing to watch out in 2019 is how the markets react to the global slowdown due to tighter liquidity.
From 2008, the US, Europe and Japan injected trillions of dollars of liquidity into the financial system to alleviate the financial crisis. After almost a decade of cheap money and low interest rates, the tide is now reversing. Instead of pumping money into the system, the central banks are now withdrawing money from the system. How equity valuations sustain in this scenario of tighter liquidity and higher interest rates will be key. There surely will be opportunities that investors will be able to take advantage of.
We are living in an uncertain world. It is best for investors to stick to their asset allocation plans. If your financial goals are five plus years ahead, then bulk of the allocation should be made into equity and equity mutual funds, preferably through the SIP route. Any goal less than five years, then bonds and debt funds should best serve you. For very short term needs, say below 18 months, liquid funds should serve the purpose.
(The writer is Chairman and CEO, PPFAS Mutual Fund)