INSUBCONTINENT EXCLUSIVE:
The complexion of domestic stock market changed in Calendar 2018
From a midcap-led market, focus suddenly shifted elsewhere
Midcaps lost sheen and have dropped considerably from their peak levels
midcap selloff became worse because of strong FII outflows during periods of rupee weakening and surfacing of ILFS crisis.
India saw a
strong bout of FII selling during year
Emerging markets as an asset class did not look too good thanks to US sanctions on Iran, trade war and other factors.
Equities across
emerging markets saw strong redemption pressure and India had its share of selling too
India-specific issues like currency depreciation on strong oil prices in September and ILFS crisis did not help matters
While earnings are expected to expand by around 14 per cent in FY19, market is on course to end nearly flat.
This has ensured that
valuations are much better now than they were at start of year.
Valuations are defendable: The New Year brings hope of easing of some issues
that kept market sub-par in CY18
Valuations that were high at beginning of last year have corrected considerably
This provides a big comfort
At 16.5 times FY20 earnings, valuations are now defendable and one should expect to get returns in line with growth rate, compounding into
future.
Here it is important to understand that a lot of growth expected in FY20 over FY19 would on account of base effect, particularly in
We believe sectors which are best placed to deliver compounding of earnings should perform better.
Expect softer global growth to keep
commodity prices soft: While oil prices can rise again on an OPEC deal, however, at moment they are lower than they were at any point in
This provides big support to margins of India Inc and supports India growth story
Global growth should be softer in 2019 than in 2018 given issues that have to be dealt with
US-China trade spat seems al set to continue
Brexit would have to be dealt with
Like Fed, ECB would also start to taper and that should have a bearish impact on commodity prices
Already prices of metals and oil are down.
Consumption to remain key growth driver vs Capex or exports: Growth in consumption would be
supported by lower interest rates, good monsoons in 2018 and successive farm loan waivers that are being announced
The focus on rural investments would also help boost consumption.
We do not expect capex to be a significant growth driver this year
The government has been biggest spender on capex
If we see strong wave of populist measures like farm loan waivers by state governments, money left for capex would reduce
Private sector capex has stabilised but most of larger houses, which are still bankable, are opting to buy stressed assets rather than focus
on greenfield or brownfield expansion of capacities.
Exports, other growth engine, should not be expected to be a growth driver in New Year
Governments around world focussing on protecting domestic markets, and thus generating big growth in exports would be difficult
A sizeable depreciation of rupee may have helped but our competing economies have seen similar currency depreciation and, hence, this has
not been a big support.
Aquaculture, which has seen rapid growth, should see consolidation in coming years, as industry faces higher
scrutiny in western markets
IT services are very dependent on depreciation of currency for delivering over 15 per cent growth, while industry prospects have improved vs
Generic pharmaceuticals continue to face higher compliance costs
This is no longer seen as a defensive industry.
There are a few sectors that would benefit from Chinese economy making its pollution control
China is also focussing away from labour-intensive low value-add manufacturing
While it seems that industries like garmenting is moving to Bangladesh and Vietnam, and electronics to Thailand and Malaysia, India does
seem to be able to expand its presence in chemicals substantially
The chemicals industry requires an ecosystem where discharge from one industry can be used in another and this is something very difficult
to achieve and can provide Indian industry with a great advantage.
Our outlook on flows: On flows front, we do expect domestic flows to
equity to persist given low allocation to equities in Indian portfolios
This has been an enduring theme over past few years and should continue.
While profitability of distributors would get impacted in new
fiscal as lower commissions are shared on regulatory intervention, yet business remains very profitable.
On offshore side, India has a great
chance to position itself as a safe haven amongst emerging markets
Unlike other emerging markets, we are not commodity driven and actually benefit most by low oil prices.
Our stock valuations have corrected
and can be defended well on absolute basis though on relative basis other countries may look cheaper
However, other countries have their own issues in trade wars, sanctions etc
that we are not impacted with
Very few companies in India get impacted by an event like Brexit which should impact a significant percentage of corporates in more global
economies.
CY2018 saw strong FII selling in India on EM outflows and also country specific outflows on risk aversion, currency depreciation
and local issues like ILFS
India which used to be an overweight in global emerging market portfolios became inline.
We expect New Year to see a more neutral
stance as
country specific flows gain positive momentum and neutralise any outflows from emerging markets.
Market Outlook: Corrections in stock
valuations and oil price reduction are big positives for Indian market
Let us look at which spaces are best placed to deliver strong growth in new year.
Our belief is that consumption and financiers of
consumption would continue to remain in focus
Consumption would be supported by continued low inflation and prospects of low inflation as benefit of lower crude oil prices is passed on
Spends during elections would serve as a multiplier.
Loan waivers should help
Interest rates which were going up have a great prospect of falling in New Year, if fiscal targets are adhered to
This again should help consumption
The spaces to watch would be FMCG, durables and auto
Buoyancy in consumption should help financiers in auto, CV, smaller homes, gold, microfinance and SME segments.
Metals outlook has suffered
on prospects of lower global growth rates
Domestic prices are now supported by minimum import prices (MIPs)
While this may protect downside, any upside
would be difficult.
The high quality-high sustained growth space has corrected in valuations
A large part of this space has pricing power and should benefit from improved margins as commodity prices correct
This is a part of market that we have been exposed to and we believe that this part has a great chance to deliver sustained low volatility
returns.
Happy investing and A Happy New Year!
(The author is Business Head and CIO of ASK Investment Managers
