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Opinion | Why 2019 looks more promising for stocks than 2018 As we enter 2019, the macroeconomic set-up is turning favourable for India. As macros improve and earnings of corporate lending banks return to normal, a marked revival in growth of the corporate earnings is expected to finally manifest in 2019.

Updated: Dec 28 2018 9:31PM



Let us wait it out till the elections in May 2019. That is what seems to be the consensus among investors these days. Most are happy playing the waiting game. Let the national elections get over and the uncertainty is out of the way before committing hard earned money into equities.

Sounds logical? Not really when it comes to equity investments. Uncertainty and volatility are an investor’s friends. That’s when you get good bargain buys.

After all, it is a well-proven piece of wisdom that time spent in the market counts more than trying to time the market. In the last few years alone, there have been at least three occasions when black swan events such as Brexit – the beginning of the possible end of the European Union; demonetisation – and its unknown ramifications on the Indian economy; and the beginning of the rate hike cycle in the US, ending the era of highly accommodative monetary policy.

Black swan events aren’t few and far between any more. This has prompted the coining of a new term, grey swans – perhaps coming from inability to clearly define the blackness of the swans. Let’s leave it to Nicholas Nassim Taleb to work on his own version of ‘50 Shades of Grey’.

Getting back to the markets, in all the above occasions, the corrections were rather shallow, ranging at 10-12% from recent peaks, and the recovery was quite swift with the market regaining all the lost ground in a matter of few months.

All that could go wrong has gone wrong in year 2018 

Let us begin with tactical issues. The return of the long-term capital gains tax (LTCG) on equities in the Union Budget 2018 and the introduction of additional surveillance measures wiped out speculative froth in broader markets. Reclassification of mutual fund schemes by the Securities & Exchanges Board of India (SEBI) also added to the weakness as asset managers had no option but to readjust their portfolios.

Meanwhile, multiple speed breakers affected the Indian economy’s recovery — a spike in energy prices, stiffer bond yields, rural stress and pressure on export/imports due to the US-China trade war. If this was not enough, the IL&FS crisis created a credit crunch affecting micro, small and medium enterprises (MSMEs) and consumer demand that had until then been driven by easy credit from NBFCs. No wonder then that the expected strong revival in corporate earnings growth has come under a cloud this year too.

Last but not the least, the unexpected outcome of the recent state elections hugely surprised markets. With farm loan waivers and freebies emerging as the best winning formula, there is a growing risk of the government embracing populism over fiscal prudence in the election year.

So unlike 2018, the mood is pretty sombre as 2019 begins.

It can only get better!

As we enter 2019, the macroeconomic set-up is turning favourable for India. Energy prices have cooled down, inflationary pressures are under tight control and bond yields have come down by 60-70 bps in past few weeks. Thus, the Reserve Bank of India (RBI) is expected to take a more dovish stance now. In fact, there is a growing possibility that the interest rate hike cycle is already over and the RBI could actually start reducing interest rates in 2019. The RBI has also taken sufficient measures to maintain comfortable liquidity after the IL&FS crisis scare in the money markets.

Interestingly, India is a typical top-down investment story. Past experiences show that Indian equities tend to do well when the macroeconomic environment is favourable in terms of three key variables: GDP growth, the interest rate cycle and exchange rates. We expect much better reading on all the three variables in 2019 that would be supportive for equities as compared to a sharp deterioration in macro environment in 2018.

On the demand side, election-driven spending and farm loan waivers are expected to provide support to consumption demand. Thankfully, industrial activity is on the mend as reflected by commentary from industrial companies and a surge in recent PMI readings. This bodes well for industrial growth in the coming months.

As macros improve and earnings of corporate lending banks return to normal, corporate earnings is expected to finally result in a marked revival in corporate earnings growth in 2019. A simple analysis of earnings of three corporate banks — ICICI Bank, Axis Bank and State Bank of India — shows that normalisation of provisioning requirements for bad assets could bring in incremental profits of close to Rs 30,000 crore in FY2020 over FY2019, which amounts to almost a 10% growth in aggregate profits of Sensex companies.

Thus, an earnings growth of close to 20% in FY2020 appears achievable, as other companies would contribute a similar level of incremental profits would be contributed by other companies from sectors such as IT services, retail-focused private sector banks and Reliance Industries among others.

With favourable macros and the much illusive earnings growth finally set to revive, 2019 looks more favourable for equity investors as compared to 2018.Black swan events aren’t few and far between any more. This has prompted the coining of a new term, grey swans – perhaps coming from inability to clearly define the blackness of the swans. Let’s leave it to Nicholas Nassim Taleb to work on his own version of ‘50 Shades of Grey’.

Getting back to the markets, in all the above occasions, the corrections were rather shallow, ranging at 10-12% from recent peaks, and the recovery was quite swift with the market regaining all the lost ground in a matter of few months.

All that could go wrong has gone wrong in year 2018 

Let us begin with tactical issues. The return of the long-term capital gains tax (LTCG) on equities in the Union Budget 2018 and the introduction of additional surveillance measures wiped out speculative froth in broader markets. Reclassification of mutual fund schemes by the Securities & Exchanges Board of India (SEBI) also added to the weakness as asset managers had no option but to readjust their portfolios.

Meanwhile, multiple speed breakers affected the Indian economy’s recovery — a spike in energy prices, stiffer bond yields, rural stress and pressure on export/imports due to the US-China trade war. If this was not enough, the IL&FS crisis created a credit crunch affecting micro, small and medium enterprises (MSMEs) and consumer demand that had until then been driven by easy credit from NBFCs. No wonder then that the expected strong revival in corporate earnings growth has come under a cloud this year too.

Last but not the least, the unexpected outcome of the recent state elections hugely surprised markets. With farm loan waivers and freebies emerging as the best winning formula, there is a growing risk of the government embracing populism over fiscal prudence in the election year.

So unlike 2018, the mood is pretty sombre as 2019 begins.

It can only get better!

As we enter 2019, the macroeconomic set-up is turning favourable for India. Energy prices have cooled down, inflationary pressures are under tight control and bond yields have come down by 60-70 bps in past few weeks. Thus, the Reserve Bank of India (RBI) is expected to take a more dovish stance now. In fact, there is a growing possibility that the interest rate hike cycle is already over and the RBI could actually start reducing interest rates in 2019. The RBI has also taken sufficient measures to maintain comfortable liquidity after the IL&FS crisis scare in the money markets.

Interestingly, India is a typical top-down investment story. Past experiences show that Indian equities tend to do well when the macroeconomic environment is favourable in terms of three key variables: GDP growth, the interest rate cycle and exchange rates. We expect much better reading on all the three variables in 2019 that would be supportive for equities as compared to a sharp deterioration in macro environment in 2018.

On the demand side, election-driven spending and farm loan waivers are expected to provide support to consumption demand. Thankfully, industrial activity is on the mend as reflected by commentary from industrial companies and a surge in recent PMI readings. This bodes well for industrial growth in the coming months.

As macros improve and earnings of corporate lending banks return to normal, corporate earnings is expected to finally result in a marked revival in corporate earnings growth in 2019. A simple analysis of earnings of three corporate banks — ICICI Bank, Axis Bank and State Bank of India — shows that normalisation of provisioning requirements for bad assets could bring in incremental profits of close to Rs 30,000 crore in FY2020 over FY2019, which amounts to almost a 10% growth in aggregate profits of Sensex companies.

Thus, an earnings growth of close to 20% in FY2020 appears achievable, as other companies would contribute a similar level of incremental profits would be contributed by other companies from sectors such as IT services, retail-focused private sector banks and Reliance Industries among others.

With favourable macros and the much illusive earnings growth finally set to revive, 2019 looks more favourable for equity investors as compared to 2018.


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