Investors should continue to focus on stock selection and overlook the clamour that we would hear over the next 6 months, as we approach the general election.
India is in the midst of a structurally high growth phase and remains the fastest growing economy in the world with IMF projecting 7.3 percent and 7.5 percent GDP growth rates for FY19 and FY20, respectively.
However, 2019 will be earmarked with uncertainties pertaining global as well as domestic factors. There would be two different and powerful developments that are expected to influence the world markets, viz. a)return to pre-crisis normalcy in the global monetary system and b) an uncomfortable new normal in international politics and global relations.
The withdrawal of monetary stimulus coupled with a rate rise in the US conspicuously left the markets more vulnerable to the political shock of escalating international trade war, in particular.
We expect the global expansion to continue in 2019 despite risks emanating from politics and international relationships, as the economic expansion outside the US would provide the necessary fillip to world economic growth.
The market performance in 2018 was a contrast to 2017 with most of the equity markets falling hitherto, while on the flip side, 2017 had seen a steep rise.
Although volatility will rule the roost, we do expect 2019 to be a good year of performance for equities. The pace of monetary policy normalisation in the US is slated to slow down, as the positive impact of fiscal stimulus on economic growth starts waning away.
This should culminate in dollar weakness in 2019, which will, in turn, bode well for emerging markets (EMs). The trend of ~15 percent divergence between the performance of developed and emerging markets since the inception of the year should perhaps reverse in 2019.
With respect to India, the benefits of implementation of several structural reforms such as introduction of Goods & Services Tax (GST), Insolvency & Bankruptcy code (IBC), RERA, JAM (Jan Dhan, Aadhar, Mobility) have started to manifest in the growth numbers and will aid in removing inefficiencies from the economy and formalising the same.
Corporate earnings have started picking up after a lag of 4-5 years. Albeit, the net profit (PAT) growth in Q2FY19 was at a mere 10 percent, the revenue growth was at a multi-quarter high.
The PAT growth was essentially impacted by higher input costs (crude linked, metals, etc.) which ideally should reverse going forward, as most of these prices have eased.
For FY20, we expect to see high teens earnings growth led by normalisation of the earnings for the banking stocks, a surge in infrastructure related CAPEX and consumption ahead of general elections.
On the valuations front, while the Nifty looks optically at an elevated level, it is only a handful of stocks that are holding the Nifty. Post the recent correction, the excessive valuations, especially in midcaps and smallcaps have also settled down.
The market has reverted to near long-term averages, which makes them attractive. While we are cognizant of the near-term events such as elections, which could inject a bout of volatility, we believe it will not have any material impact over the longer run, irrespective of the result.
We believe the volatility in the markets over the next few months will provide a good opportunity to build a quality portfolio from the long-term standpoint, as India is firmly entrenched on the growth path.
Sectors in focus:
We remain positive on the corporate banks. We believe that we are transitioning from the asset quality recognition phase to resolution phase as testified by the initial success seen in the NCLT cases, wherein the recovery rates have been either inline or better than estimates.
Besides, incremental stress formation has reduced significantly, as reflected in the Q2FY19 results of all corporate banks. Going forward, with the normalisation of credit costs, we expect a significant turnaround in profitability and return ratios of banks.
We also have a positive view for the cement sector, as we expect the capacity utilisation for the industry to go up, which will eventually bring back the pricing power in the sector.
Furthermore, the input costs have been truncating due to fall in crude oil prices and some appreciation of INR, which should aid profitability going forward.
We remain bullish on the discretionary consumption space as most of the impeding factors such as high crude, up fronting of insurance costs, and credit squeeze due to NBFC issues, which led to a muted festive season, have now reversed.
We expect to see the continuation of the premiumisation story play out in the discretionary consumption arena.
What should be the investment philosophy of investors?
Investors should continue to focus on stock selection and overlook the clamour that we will hear over the next 6 months, as we approach the general elections.
We are a firm believer in the long-term India story due to its very large consumer base, increasing affluence and strong demographic dividend. We would advise investors to deploy capital in a systematic manner and not time the market to take advantage of this large long-term opportunity.
Compounding of capital will be more important than timing the markets. The stock prices over longer-term always follow the earnings cycle and hence that is where the focal point should be for the investors.
Staying on the course is what makes one a successful investor. If you are investing for the next five to ten years, the focus should be on the opportunity and ways to harness it.
One should align their investments as per one’s goals and risk profile and use market corrections to their advantage to invest for the long term.
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