We welcome the year 2019 with optimism as the concerns pegging the markets in 2018 are taking a back seat. The rollercoaster ride of 2018 unnerved both the global and Indian investors. Volatility due to trade-war concerns between the US and China affected the global GDP growth and four rate hikes by the US FED followed by a rise in dollar index negatively affected the emerging market currencies. The uncertainty of the UK Brexit deal, crash of crypto-currencies, slowdown of the Chinese economy added to the woes of the equity markets globally. The Indian equity market proved resilient and closed in the positive by ~6 % in rupee terms, though it was plagued with concerns like introduction of Long Term Capital Gains on equities, IL&FS fiasco, and unearthing of PNB scams, which added to the volatility. Going forward, the Indian equity market will be driven by three Es — Earnings, Economy and Elections. The stronger macros and earnings growth recovery will triumph over any political uncertainty and thus substantiate our idea for going overweight on equities as an asset class. We favour allocations towards equity in a staggered manner and investment primarily in large cap stocks vis- a- vis mid and small cap stocks, with financial services, automobile and consumer durables as our top sector picks.
The Indian equity market was rocked with major changes, like the introduction of long term capital gain tax (LTCG) on equities coupled with re-categorisation of mutual fund schemes which slowed the equity market rally of 2018. The major effect was felt among the Mid and Small cap stocks with the BSE midcap and small cap indices turning negative by ~13% / ~24% respectively, on YoY basis while the large cap index closed mildly in the positive by ~6% as portrayed by the Sensex. The sharp rupee depreciation against the USD by ~9.5%, intermittent jump in crude oil prices along with FII outflow added pressure on the twin deficits. The market sentiment took a hit with the unearthing of the PNB scam and liquidity concerns in the system raised its head as the IL&FS fiasco erupted, proving detrimental for both debt and equity market. The benchmark bond yield also suffered a rollercoaster ride, gyrating between the ~7.10 level and ~8.20 level and finally closing around the 7.35 level at the year end.
Though volatility is anticipated in the first half of 2019 due to the general elections, we expect the second half of 2019 to remain fairly stable. Strong reforms like GST, Insolvency and Bankruptcy code (IBC) and RERA have laid down a strong foundation for the Indian economy. The GDP growth rate in the range of 7.3-7.5% for FY19E along with likely continuation of the momentum well into FY20, on the back of strong gross capital formation, will help India retain the fastest growing economy tag. Tailwinds like steady macros, higher GDP growth, stable currency, benign inflation, and expected higher capex will act as a perfect recipe for a positive equity market. Recovery in earnings, and expected stronger earnings growth in 2019 (~20%) aided by lower bond yields and rural consumption should result in above average returns from the equity market in 2019. More support to the equity market in terms of liquidity would be well backed by renewed inflows of funds by FIIs and higher domestic participation. For 2019, we are overweight on financial services, automobile/auto ancillaries, consumer durables and capital goods, while being neutral on the Information Technology and the Pharmaceuticals space. The high government spending on the infrastructure development and greater focus on schemes like affordable housing may lend support to the cement, metals and the infrastructure sector, which can evolve as surprises in the pack. Keeping the ensuing volatility of the equity market in mind and comparative attractive valuation of the large cap stocks, we prefer greater allocation to large caps over midcaps and small caps.
We are overweight on the financial services sector as we expect credit growth offtake to sustain in 2019 and liquidity returning to normalcy among NBFCs in the second half of 2019, with the softening of the bond yields from the highs of ~8.20 level, treasury gains for the banking stocks are on the anvil. Credit growth is on the rise which makes the banking sector an attractive investment opportunity. Selective PSU banks may become good buys, as mergers and bank recapitalisation will ensure a robust balance sheet and greater access to the customers. Most of the non-performing assets (NPAs) have been recognised, and recovery process has been initiated. The NPA recovery is not only positive for the banking sector but also for the economy in general. The rural consumption thesis holds strong for the Indian economy, as it contributes over 50% to the India s GDP, along with ~ 50% contribution towards the FMCG sales. 2019 being the election year, anticipation of sops and benefits for the rural masses are high, which would be a potential driver for the consumer durables, FMCG and the automobiles sector. Adequate monsoon in 2018, higher Minimum Support Price (MSP) promised by the Government and generation of jobs in the rural economy will help the rural demand going strong. The urban consumption will also remain strong on the back of government pay revisions, lower inflation and easy credit access.
Though we witnessed a temporary slack in the automobile sector, we anticipate a turnaround by the second half of 2019 while the auto ancillary sector will continue to post robust numbers. With replacement demand intact and the anticipated rise of the volume growth in automobiles, we are bullish on the sector. Higher raw material cost dented the EBITDA margin for the sector in the past, but the recent decline in the commodity prices will support the industry going forward. Going forward we feel the government s focus on rural and urban infrastructure will continue, thus creating more jobs, adding to more productive assets and maintaining the high rural demand which will have a positive effect on the entire economy. Anticipation of private capex is also on the rise with oil and gas, metal mining and capital goods sector being the main beneficiaries. The government capex plan is already in place and going forward is bound to increase, thus forming a base for the private capex .
Thus, to conclude, we foresee equity as an asset class to outperform all the other asset classes in 2019. On the fixed income side we continue our suggestion to invest in short term bond funds and Fixed Maturity Plans (FMPs). Investment in commercial real estate assets through AIFs and pooled funds are suggested as a turn in cycle is clearly visible. Thus, an asset allocation as per the risk profile of the investor is suggested, with a clear overweight on equities.
(By Abhijit Bhave, CEO, Karvy Private Wealth)