It would seem natural for brokerage firms or mutual funds to hardsell the India equity story at the beginning of the new calendar year when sentiments are buoyed by a 28% rise in the Sensex in 2017. This, however, has not been the case — on the contrary, brokerage firms have been managing investor expectation, cautioning that the superior returns generated by the markets in 2017 may not be replicated in 2018. Voices around expensive valuations, too, have grown shriller. This is good advice — because equity returns are dependent on multiple variables, including global economic and geopolitical factors and domestic political developments. That is a risk that equities carry — it is also the reason why it is prudent to enter equity markets with an investment horizon of at least three to five years, and a single year’s superior return should not become the benchmark for expectations of future returns.
The performance of equity markets this calendar year will depend on a number of factors, including the trajectory of inflation, the growth of corporate earnings, the movement of global crude prices, the outcomes of forthcoming elections to state Assemblies, the last full-year Budget of the Modi government before the Lok Sabha elections of 2019, the recovery of global growth, and a range of geopolitical developments.
In a recent report, Kotak Institutional Equities Research said that in terms of returns, “CY2017 is not coming back”. While a large part of the 23% growth in net profits for FY2019 (Kotak’s own estimate) could be discounted in the current high valuations, the performance of markets in 2018 would largely depend on whether earning estimates for FY19 are met, and the confidence continues in FY20 earnings, the report said. “Domestic and global macro-environment factors may”, however, “be less favourable than in CY17”, it pointed out.
There is some concern about government finances as well. A broad consensus is emerging that the fiscal deficit for the year may overshoot the target by around 30 basis points. “In the backdrop of high government spending and lower-than-expected GST revenue collections, the fiscal deficit trend will be keenly watched. Continuing weakness in GST collections will be a real concern for the deficit situation,” Anand Radhakrishnan, CIO, Franklin Templeton Investments, said.
Performance in 2017
The 28% rise in the Sensex at the Bombay Stock Exchange was the highest calendar year gain since the 29.9% rise in 2014. The midcap and smallcap indices rose 48% and 60% respectively, marking a broader market rally in 2017. The capital goods, banking, auto, and oil and gas sectors each rose by more than 30%; consumer durables, real estate, metal, and telecom, too, did very well.
It is important to note that the equity gains in 2017 came despite the noise around the implementation of the GST, the impact of demonetisation, the decline in GDP growth rate, US protectionism, and the steady escalation of tensions between the US and North Korea.
The many challenges notwithstanding, the markets derived comfort from a disciplined Budget, the BJP’s victories in the key states of Uttar Pradesh and Gujarat, the movement towards a resolution of the NPA crisis, and the announcement of the Rs 2.1 lakh crore recapitalisation plan for public sector banks. Very strong support came from domestic retail investors — the net inflow into equity mutual funds between January and November reached an all-time high of Rs 1,25,280 crore.
The buzzwords for 2018, according to Radhakrishnan, could be “private capex recovery, exports growth, global growth acceleration, firming inflation and monetary tightening”. The movement in global crude prices and the state Assembly elections will be other key factors.
Optimism with riders
2018 has started on a positive note, with December witnessing the fastest pace of expansion in manufacturing in five years — the bellwether Nikkei India manufacturing Purchasing Managers’ Index (PMI) rose to 54.7 in December from 52.6 in November. This was in line with the strong rebound in the sales of commercial vehicles in December. Tata Motors recorded domestic sales of commercial vehicles at 40,447 units last month, a 61.8% jump over sales in the same month of the previous year. Ashok Leyland sold 15,950 units of medium and heavy commercial vehicles in December, a rise of 81.62%, and Eicher’s sales of trucks and buses rose nearly 51% to 5,955 units.
Despite the positive news flow, the equity markets opened on a cautious note. In the first three trading sessions, the Sensex remained flat. The markets are keenly awaiting corporate results of the third quarter, while watching the movement of crude oil prices and private sector investment.
“The performance of the Indian market in CY2018 will largely depend on (1) FY2019 earnings meeting the Street’s and our high earnings growth estimates and (2) reasonable confidence about mid-teens growth in earnings for FY2020,” the Kotak report said. It expressed confidence about FY2019-20 earnings, but said projections could go wrong if inflation and global crude prices rose, and the global economy, especially China, slowed.
While mutual funds saw the highest ever net inflow (Rs 1.25 lakh crore) into equity schemes in the first 11 months of CY2017, and mobilisation through IPOs touched an all-time high of Rs 68,826 crore last year, it is expected that the retail money may continue to chase equities. Physical assets have lagged significantly in performance and failed to attract investors — and declining interest rates and cuts in interest rates of small savings schemes, including the public provident fund, are likely to divert debt investors towards equity in search of better returns.