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Stock market to remain volatile in 2019; All eyes on politics, capex and interest rates

B Gopkumar     January 7, 2019

Indian equities witnessed mixed trend in 2018, which included issues pertaining to global trade war and oil prices that remained at centre-stage throughout the year. The market saw sharp sell-off during September-October 2018 on back of IL&FS fiasco and lingering liquidity crisis in the financial sector but managed to gain some lost ground to end marginally positive.

The Nifty 50 index and BSE Sensex gained 3.2% and 5.9%, respectively. However, Indian equities shed a whopping Rs 7.2 lakh crore in value-term (market-cap) during 2018, indicating that outperformance was mainly led by select large-caps. There was a massive erosion of value among mid-cap and small-cap stocks. The Nifty Mid-cap and Small-cap indices plunge over 16% and 30%, respectively. DIIs continued to remain the backbone of Indian equities that infused over Rs 1.1 lakh crore in 2018 (DII invested Rs 1.17 lakh crore in 2017), as compared to FPIs that were net sellers in 2018 to a tune of $4.5 billion.

Politics, capex and interest rates to play a key role

Going ahead, the equity market will remain volatile ahead of the general election in the first half of 2019. Market will look forward to three things in 2019 - a) Stable government with clear majority should be voted to power, b) recovery in private capex cycle and (c) reversal in interest rate scenario led by lower inflation and oil prices. A strong government at the center will see a re-rating in the Indian equity market. Until elections, market will remain rangebound and take a cue from global market and the corporate performance of India Inc.

Notably, moderate GDP growth in the first half of FY2019, double-digit growth in gross fixed capital formation (GFCF) and a decent growth in bank credit along with improving capacity utilisation across the manufacturing sectors (already surpassing 70% mark) make a case of likely revival in private capex cycle from 2019 onwards. Revival of private capex cycle is utmost important to support corporate earnings trajectory, as populist measures ahead of election may apparently leave the government with paucity of funds for incremental public spending.

Moreover, likely slowdown in global growth led by trade war and persistent increase in oil stockpiles in the USA may keep the oil prices low and aid in keeping inflation, especially CPI under the Reserve Bank of India's reference range. Thus, reduction in interest rate cannot be ruled out, we expect key policy rates to be cut if not in February 2019 then April 2019 for sure. Interest rate reversal is likely once again to drive especially the NBFC companies and infrastructure players.

We firmly believe that stable rupee, twin deficits, concerns over corporate earnings growth in the US and dovish stance of the US Federal Reserve are likely to propel the FPIs to infuse more into Indian equities and bonds in 2019. Hence, unlike 2018, the FPIs are likely to be the net buyer in 2019 extending support to the Indian rupee and Indian equities.

Invest in quality; Take time to build your portfolio

In nutshell, we expect market to witness sideways movement in the first half of 2019 and take a remarkable leap in second half with emerging clarity over political landscape and sustained low oil prices and soft headline inflation. We advise investors to invest in quality stocks, where the valuations are either comfortable or trading lower with historical average. There are many quality counters in mid-cap and small-cap space, which offer healthy risk reward proposition post sharp correction in 2018.

We continue to believe it's not a runaway market and investors should do a SIPs and gradually increase their exposure to equities. Market volatility confuses investors often about the direction of the market. Thus, take time to build portfolio. Allocate when markets are spooked and buy high quality large-caps when the markets look the most stressed. Accumulate mid-caps with more study about the fundamentals. Allocation of 60% to large caps while 40% to mid-cap and small-cap for a risk neutral investor with no immediate cash requirements is advisable. For a risk averse investor, investing 80-85% in large-cap stocks and 15-16% in mid-caps is a good framework to build a portfolio for 2019.

B Gopkumar is ED & CEO, Reliance Securities


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