India's equity markets rallied sharply in 2017, as investors expected earnings growth to rebound and investors pumped huge money into equity mutual funds. While the strong liquidity is expected to continue as investors continue shift to financial assets from physical assets like gold and real estate, returns this year are likely to be more moderate.
While there were a few minor corrections, over calendar 2017, the benchmark BSE Sensex and NSE Nifty50 climbed 28 per cent. However, in 2018, there may be more volatility as there are more moving parts – rising concerns over fiscal slippage, last full budget of the Narendra Modi-led government before general elections in 2019, assembly elections in key states across the country and the fact that the market valuations are already high.
“2018 is more likely to be like a bowling pitch or a South African pitch, compared to an Indian pitch,” says Nilesh Shah, MD of Kotak Mahindra Asset Management Company, comparing the road ahead for equity markets this year to the bouncy bowler friendly pitches in South Africa, where India recently lost the test match.
“It doesn't mean that you can't play on a South African pitch, it just means that you have to change your technique, you have to change your temperament,” said Shah.
The fund house is essentially sending a message that those looking for longer term returns should continue to invest in the equity market, but one needs to be cautious in the short-term.
“There have been various reforms that have taken place, which may not be visible immediately in terms of overall improvement, but market and investors will fathom some of those happening. At the same time, if you look at the valuations, we are saying there are risks and market seems to have gone ahead of fundamentals. It is going to be more moderate returns that is going to come by over the next few quarters,” said Harsha Upadhyaya, chief investment officer – equity at Kotak AMC.
The key factor investors are banking on is a pickup in corporate earnings growth. In the quarter-ended September 2017, earnings grew in double-digits for the first time in thirteen quarters. Earnings are further expected to pick up in the October-December quarter, aided by the low-base of last year.
However, the market may have already factored in this earnings pickup and therefore may not be a big booster for stocks this year.
Aditya Birla Sun Life Mutual Fund also sees “low-teens” returns from equity markets over the next couple of years.
“To a large extent, market is factoring in earnings growth. That is why a further re-rating from here of market P/E (price to earnings) multiple is difficult. The margin of safety to that extent is much lower at this point in time. If the markets continue to deliver earnings in the mid-teens, markets can probably deliver returns, which is slightly lower than the average earnings growth being factored in,” said Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life MF.
A big worry for investors right now is on the fiscal front. Government's fiscal deficit touched 96 per cent of the full year estimate in the seven months ending October 2017. The government's recent announcement that it would borrow additional Rs 50,000 crore by selling bonds, has raised worries that it would find it difficult to maintain the fiscal deficit at 3.2 per cent of the country's gross domestic product.
"While you have to build the economy to the next level, fiscal prudence is very important," said A. Balasubramanian, CEO of Aditya Birla Sun Life MF.
With assembly elections in several states in 2018 and the general election in 2019 looming large, there is also a feeling that there might be some populist measures that the government may take, which could weigh on the fiscal front.
“Market generally gets re-rated when fiscal deficit is coming down. This year there is likely to be a fiscal slippage, but we should honor the glide path, which was promised earlier,” said Shah of Kotak AMC.
Some global brokerages too are expecting equity returns to moderate to around 10 per cent this year. Deutsche Bank's Nifty target for the year-ending December 2018 is at 11,500, while CLSA sees Nifty at 11,400. UBS, however, has a December 2018, Nifty target of 10,500, meaning there could be no returns this year at all as a recovery in earnings and macro stability may be already priced in, it said. The benchmark index ended 2017 at 10,530.70 and further closed up at 10,632.20 on Wednesday.
