Indian Market Outlook Final 2019
1. Recap Year 2018
1. Equity Market Performance.
- Debt Markets reflected a rise in yields impacting the valuations on longer maturities.
3. Emerging market currencies showed sharp depreciation
4. Micro market behaviour within equity markets
- Within equity markets the sector and stock gainers have been very narrow with a large number of funds underperforming the indices.
- The gainers have been Consumption which is a evergreen theme, Technology that gained due to the rupee depreciation and Banks mainly lead by private sector names that have gained market share due to a defunct public sector.
- The mid and small cap -oriented funds took a hit compared to the larger names given that the valuations were higher than large caps, rising cost of capital that relatively impact this segment higher and lower liquidity given that change in SEBI norms for mf scheme classifications.
2. Our view on market behaviour in 2018
- Lower liquidity by Central Banks and Rising rates, thereby reducing the rate gap between safe assets and equity assets.
2. Central bank balance sheet size shrinking
3. Gap between equity and benchmark 10 year yield increasing.
4. High oil prices, thereby a current account deficit that ballooned during the year.
- The twin balance sheet problem faced by the public sector banks and infrastructure corporates, thereby not leading to a fresh infrastructure loan cycle.
- RBI being far more hawkish, with very high real yields which shifted the power equation from borrowers to depositors. This has also not helped fixed income investors in 2018 given that they have been impacted by valuation loss.
- Equity market valuations had run up ahead of fundamentals.
- The equity market seems to be fair on a price to book basis. However, the price to earnings does not seem to be improving with lower than expected earnings growth and return on equity not improving to historical levels.
3. Positives and negatives that await 2019
Positioning Portfolios
- Fixed Income investors can position portfolios in maturities of one to three years. This helps obtain the higher carry at 3 year maturity and not maintain any mismatch between when they can be liquidated with long term capital gains.
- Risk averse investors to be closer towards the six- month to one- year segment.
- Investors with risk appetite and very long- time horizons can take exposures to long end with a caveat that the view will change if inflation targeting regime is completely relooked as a policy measure by RBI.
- Also, one needs to time entries based on levels of the markets.
- This will help provide some hedge in case the long -term rates come down on a structural basis.
- We expect 2019 to be a better year for equity markets compared to 2018 with a number of fundamentals turning positive.
- We can continue to see narrow set of gainers and large variances between the performers and non- performers. Hence, one needs to be selective in the mandates chosen as well as manager selection.
- Index investing has rationale post the very mandated nature of stock universe for schemes based on the new regulations issued by SEBI. Index investing also helps to do a SIP using value cost averaging concept as against a regular SIP which does not factor in rising markets.
- We would not recommend any sector specific recommendations as we believe that this can have significantly different outcomes and do not believe that we have any special expertise to evaluate this.
- Manager selection can make a large difference given the significant gaps in performances over a cycle. As the general saying that the winner takes it all also applies to investing with managers who can navigate the cycles effectively.
- We believe that diversification is required in portfolios. Two key diversification strategies that we advocate is asset allocation and geographic diversification.
- We have seen investors paying large attention to asset allocation with not so much importance to geographic diversification due to strong home country bias
- We believe that diversification on assets that are not INR denominated needs to evolve given the ups and downs of macros that India has been witnessing in the past.
- The theme has played out well in the past year. However, this will continue on a cyclical pattern.
- Hence, we would advocate investors to gradually incorporate the same into portfolio asset allocations.
6. Factors to look out for
- Global and local interest rates and liquidity that can have consequent effects on both fixed income and equity markets.
- Oil prices impacting the Indian macros adversely.
- Resolution of stress asset problems plaguing the Indian banking system and a fresh cycle of growth.
- Improving earnings and return ratios for corporate India.
- Further worsening of current account deficit leading to further currency depreciation.
- Stress in markets due to credit events or negative shocks that come by. However, this will be opportunities to realign portfolios.
7. Important data points
8. References of events impacting 2019
All graphs in the note has been sourced from ICICI AMC outlook 2019 and IDFC AMC outlook 2019. The note has been prepared and updated as on 18 Jan 19.
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