A sharp movement in crude oil price marked the year 2018. From close to 70 US$ at the start of the year it rose to over 80 US$ before falling to 50 US$ levels near year-end. Consequently, we saw some widening in current account deficit. Movement in oil prices also influenced Rupee and interest rates.
Increased tensions on global trade front also kept the markets jittery in 2018. On a positive note, 2018 was a year when we saw a decrease in dependence on foreign inflows and an increase in dependence of domestic flows for equity markets. This was further highlighted in the last month of the year. Despite an unexpected resignation by RBI governor and a Fed rate hike in December, markets held up thanks to strong domestic inflows.
How did funds react?
Choppy markets and excessive volatility resulted in subdued returns on equity markets. Overall, technology funds, which benefited from the sharp depreciation in Rupee and robust corporate earnings, were the star performers in the equity space. Meanwhile, PSU funds delivered the lowest returns. On market capitalization basis, large cap funds outperformed the mid and small cap schemes.
We spoke to Atul Bhole, Fund Manager, DSP Mutual Fund, E. A. Sundaram, CIO Equities, DHFL Pramerica MF and S Krishna Kumar, CIO Equities, Sundaram Mutual to understand equity market triggers in the near term and 2019-market outlook.
Triggers
According to Bhole, in the near term as there are no key events lined up, markets will derive cues from fundamentals. Primarily, the markets will track third quarter results and the guidance given by companies, said Bhole. Krishnakumar too mentions corporate earnings to be an important parameter for the market in the coming months.
In the near term, markets will also track local and global events, shared Sundaram and Krishnakumar.
Other events on market’s radar will be election results, said Sundaram. Seconding Sundaram, Bhole placed elections and stance of RBI in the upcoming monetary policy meeting as events to watch out for in the coming months. Inflation expectation will also affect market sentiments in the near term as RBI closely tracks inflation trajectory while determining interest rates, added Krishnakumar.
However, on a long-term basis corporate earnings and the valuation at which a security was purchased are the two key drivers of equity market returns, concluded Sundaram.
What to expect?
Krishnakumar’s outlook for 2019 is quite positive based on the improvement in macroeconomic fundamentals. However, in the near term, he expects markets to be volatile driven by global and local events. Until election, markets are likely to deliver limited returns. However, once a stable government is elected at the center, he anticipates 2-3 years of growth.
According to Bhole, in the next six months, markets are likely to be range bound with downside support near 10,000 levels. US China trade tensions and US Fed rate hike trajectory are other near term woes for the market. However, once we cross the election hurdle, Atul is optimistic about the growth in equity markets. Pick-up in corporate earnings in 2019 and markets trading at attractive valuations are the key positives as we enter 2019.
Sundaram too expects better earnings growth in 2019 compared to the previous year. The engineering and capex companies could benefit from the increased capex utilization in 2019. Moreover, with the worst of NPA problems behind us, there may be some positive offshoots in the space.
Sectoral preference
Sundaram is bullish about engineering and capex companies and selective PSU banks.
Bhole is bullish about retail and corporate banks, consumer staples and consumer discretionary sectors. He is cautious about automobiles, oil and gas.
Krishnakumar is bullish about consumption theme and private banks. He also expects corporate banks to make a comeback. In addition, capital goods companies may benefit from the unutilized capacity over the next 6 to 12 months. Currently, he is bearish about metals and telecom.
What should you recommend to your clients?
Currently, investors can look at large cap, balanced and multi cap funds, said Bhole. Despite the recent correction in mid and small cap space, he still recommends caution before investing in these segments. In addition, he feels that investors can also consider lump sum investment as the downside looks limited and the macro outlook is turning favourable for India.
Sundaram feels that investors should invest in a mix of large mid and small cap based on their risk profile. The proportion of each segment can be in line with the investor’s risk appetite. According to Sundaram, over the long term, all the three (large, mid and small) have delivered similar performance and the outperformance by one segment is only on a short-term basis.
As the next six months are likely to be volatile, Krishnakumar recommends investors to invest in a staggered manner. Moreover, the mid and small cap segment has significantly underperformed in last one year compared to large cap. The dual positive of improving growth prospects coupled with lower valuations make mid and small cap space attractive currently.
