After a blockbuster 2017 for equity markets, where the benchmark stock indices jumped 28 per cent (Sensex rose 27.90 per cent, while Nifty 50 gained 28.60 per cent), 2018 saw bouts of extreme volatility. Both the BSE Sensex and NSE Nifty 50 swung wildly, but they are now likely to end the year on a positive note.
On Wednesday, the Sensex fell sharply in early trade, but recovered through the course of the day to end 235 points or 0.7 per cent higher at 35,704.66 points. The Nifty 50 closed 66 points or 0.6 per cent higher at 10,729.85 points.
As of close on December 26, the Sensex is up near 5 per cent in 2018, while the Nifty 50 has gained nearly 2 per cent.
Heightened trade tensions between the US and China, interest rate increases by the US Federal Reserve, a surge in crude oil prices, which was followed by an equally sharp fall in prices in the last couple of months, rupee depreciation, uncertainties around Brexit deal and election losses back home for the ruling BJP government, kept investors on the edge through the year.
Amid global geopolitical tensions and as the dollar strengthened on the back of Fed rate hikes, foreign institutional investors (FII) pared their exposures to emerging equity markets like India, which also weighed in. But, a big positive trend was that domestic fund flows largely remained strong through the year, which cushioned the selling by FIIs.
Although FIIs invested Rs 59.81 billion in India's equity market in November and Rs 28.13 billion in December, for the year until December 26, they have net sold 333.44 billion worth equity, according to data from NSDL. Similarly, they pulled out Rs 477.78 billion from the debt market.
On the other hand, between January and November, equity mutual funds saw inflows of Rs 1.06 trillion.
With the Parliamentary elections looming in 2019, and trade tensions likely to continue, analysts say equity market volatility is unlikely to subside.
“2019 is not going to be any way different from 2018 in terms of volatility, because we have the general elections lined up, we have the trade talks ongoing between the US and China... There will be lot of action happening on the international as well as domestic front and that will impart volatility to the market,” Sanjay Dongre, senior fund manager at UTI Mutual Fund said.
Foreign securities firms like BNP Paribas see it as a year of two halves for the broader emerging markets, more particularly the case for India.
“It is particularly relevant in the context of India where the first half of the year could be turbulent in the context of likely earnings downgrades, continued oil price volatility exerting pressure on the rupee, heightened government borrowing to bridge the fiscal gap and uncertainties surrounding election outcomes. The second half, with likely resumption of foreign flows and visibility about government policies in the aftermath of government formation, should be more stable,” said Manishi Raychaudhuri, Asia-Pacific head of equity research at BNP Paribas.
A pickup in corporate earnings will be a key thing to watch for in 2019. So far in the current year ending March 31, 2019, it has been a mixed bag with broader revenue growth picking up but profit growth muted.
“The earnings have not really kept pace even this financial year. We believe it (FY19 earnings) will be more towards the mid-teens, rather than the way we started the year close to about 20-22 per cent,” said Harsha Upadhyaya, chief investment officer (equity) at Kotak Asset Management.
While challenges remain on the earnings front, the recent correction in crude oil prices and rupee recovering against the US dollar has given some comfort on the economic front.
“India presents a somewhat surprising combination of improving macro-economy but a pedestrian corporate earnings environment. Notwithstanding the recent disappointing GDP growth print (7.1 per cent in July-September 2018), broad direction of growth has been resolutely upwards since the mid-2017,” said Raychaudhuri.
BNP Paribas economists expect India to be the only market likely in a “goldilocks” scenario in 2019, with inflation declining and growth “accelerating.”
Most analysts point out that equity market valuations are no more expensive, particularly in the midcap and smallcap space, which has seen a sharp correction. The BSE midcap and smallcap indexes have fallen 15 per cent and 25 per cent, respectively this year.
“We had seen an introduction of long-term capital gains tax this year. In the mid-year, we had the recategorisation of mutual fund schemes, where many MF schemes' mandate was roughly to invest in largecaps, but they were more exposed to midcaps and they had to correct their holdings and sell midcaps. That's where we have seen that significant correction in midcaps and smallcaps. Currently, we believe, the valuations are really attractive and calendar 2019 should be better for midcaps and smallcaps compared with 2019,” said Dhiraj Relli, MD and CEO of HDFC Securities.
Relli, however, stressed that one would have look at individual stocks among midcaps and smallcaps, with corporate governance being among the first filters, rather than investing randomly.
Even as investments in equity markets has picked up in recent years, especially via the mutual fund route, the overall exposure of retail investors still remains lower than the global average. Fund managers like Dongre of UTI MF say any correction in markets should be used as an opportunity to increase exposure to stocks.
“If there is a correction in the market and valuations move closer to historical averages, it would be a good opportunity to increase allocations. If earnings deliver, markets should be able to reward you with handsome returns once these events (like elections) get over,” said Dongre.
BNP Paribas has set a Sensex target of 40,000 for 2019-end, which gives it an upside of 12 per cent from the close on Dec 26. Similarly, HDFC Securities has set a Nifty target of 12,400, a potential increase of 15.6 per cent.
The expectation among market men is that domestic institutional flows are expected to largely continue, aided by retail flows through systematic investment plans. FII flows could also pick up pace post the general elections.