1 What is in the store for the markets in the new fiscal year FY2018-19?
Ans: We expect FY18-19 to be relatively volatile year given the steady one side rally seen in FY17-18. Global events are more likely to dictate market direction. The central banks in developed markets are in process of mopping up excess liquidity which they had infused in the system in their endeavour to revive their economies. Risk aversion is likely to be developed as the liquidity is sucked in; the interest rates rise is likely to cause flight of capital from emerging markets towards low risk assets like US 10 year bonds.
Domestically, the corporate earnings will hog the limelight and dictate the market movements. We have already seen the earnings revival in Q2 & Q3FY18 and the further pace in Q4 will decide the near term market direction. Monsoon is expected to be ‘normal’; the distribution and the timing across the nation will be keenly watched for the outcome of the khariff harvest. State elections and their outcomes will also have a bearing on the domestic market direction given that Karnataka is scheduled in May’18 and 3 main states- MP, Rajasthan and Chhattisgarh in Dec.’18 ahead of general elections in May 2019.
Oil prices are trading at their 3 year highs and are likely to trend northwards given the geo-political tensions in Middle East and production cuts put in place by OPEC and non-OPEC nation in the light of rising demand. India’s macros are expected to be impacted if crude oil jumps sharply as we import 80% of our requirements. Overall, we expect markets to be consolidating with downward bias in near term.
2 Since there is volatility in the market right now, what should investor do to deal with it?
Ans: Volatility should be looked up as an opportunity by the investor. It opens up prospect for an investor to accumulate the prized stocks at prices he is comfortable with if he is investing for long term. Instead of getting panicked by the volatility, an investor should always await such so called ‘sale’ in the markets where the quality stocks with proven growth potential are trading at relatively cheaper valuations.
Using the volatility the investor should undertake what is called ‘cost averaging’ and create a solid portfolio for long term investment. As one generally does not understand how to tap the volatility in markets, it makes sense for an investor to undertake systematic investment plans (SIP) which gets triggered at specific date irrespective of market conditions and helps the investor average his cost across timeline. SIP can be practiced for both individual stocks and mutual funds.
3 How are the corporate earnings expected to be?
Ans: Corporate earnings are expected to pick up pace in Q4FY18 taking cue from the last two quarters Q2 & Q3FY18 which had delivered 10% and 22% annual growth. Earnings led by automobiles, commodities and consumer products is on course for recovery but earnings of Banks both public sector and private sector are expected to under pressure due to the provisioning, lower contribution from treasury income and subdued interest income growth. Earnings upgrade cycle is unlikely to be seen before the issues of stressed assets is put to rest.
4 How will the large cap fare over Medium and Small Caps? Ans: Large caps are expected to fare better than mid and small caps in near to midterm. In the scenario of volatility, the large caps are looked up as defensive value picks. Hence, the large cap stocks offer relatively higher degree of revenue and profit certainty and hence are safer investment avenues. The large caps stock prices are less volatile than mid and small caps. The mid and small cap stocks are more volatile in nature. Though, these stocks may offer longer periods of high growth compared to large caps but they generally are associated with higher operational risks and hence higher volatility in earnings. Due to this high earnings fluctuations, mid and small cap stock prices are associated with volatile valuations and hence volatile stock prices.
5 Which are the sectors to look forward to from a long and short term point of view? Ans: India growth story has a long way to go; consumption led demand from both rural and urban pockets are going to drive the consumption and discretionary spends.
Auto and Auto ancillaries are good investment options given the under penetration and demand in this space.
FMCG and consumer durable manufacturers would be beneficiaries of the rising spending power in rural areas along with improving electricity infrastructure in villages.
Given the massive public spending by the Government for improving infrastructure, EPC companies with execution capabilities and light balance sheet are also good opportunities for investment.
Housing and related theme like housing finance, home improvement etc are still looking good given the Govt.’s target of “Housing for all by 2022” and measures put in place for the same.
The financialization and formalization of the economy has created ample opportunities for NBFCs and Pvt. Banks with retail focus. In addition to the credit growth, a shift from public sector banks to private sector player backed by visionary management is very much evident.
As global economies are doing good, the export related segments like textiles and chemicals also has ample scope for growth. India holds advantage in these two sectors on account of India being largest cotton producer (thus secured on raw material front) for textiles and better production practices in chemicals industry where the West is looking for shifting production to East and India is considered as better option vis-à-vis China. In both industries, India scores better due to lower labour cost, talented, educated workforce and stringent Intellectual Property laws.
6 Which sectors will perform modestly?
Ans: We expect IT and Pharma sectors to perform modestly as compared to above mentioned sectors and advise to avoid them. Though IT has reported fairly good results offlate, the much awaited growth is still missing. The discretionary corporate spending in US esp. in BFSI sector looks to be still far away. Given the poor growth prospects we suggest our investors to look for domestic focused growth sectors. Similarly, the pharma sector is also going through dull phase in its life cycle. In addition to USFDA issues which would probably get resolved in near term the pricing in US markets is worrying us. Hence we would recommend our investors to instead look for domestically focused sectors which have both growth potential and good pricing power.