Are there any surprises in store for Indian equity investors in 2019?
Let’s keep aside our biases and run a reality check…
As you must be aware, policymakers and politicians across the globe love status quo.
Decisive measures cause disruption and disruptions often don’t suit their narratives.
But unlike them, markets hate indecisiveness.
Ironically, they draw conclusions even from the status quo of policymakers and politicians.
Will markets take a decisive turn in 2019?
First and foremost, you can’t consider any move in isolation. A series of small events form big events. Similarly, a series of short-term market moves translate into big moves.
In 2018, India’s bellwether indices BSE Sensex and CNX Nifty have generated 5.9% and 3.1% returns, respectively. Gauged by the difference between their respective highs and lows, indices were less volatile this year.
CNX Nifty moved in a narrow range of just 11.7% while the BSE Sensex swayed in a band of 20%. This was the second least volatile year for CNX Nifty after 2013 in last 20 years. While for BSE Sensex, 2018 was the least volatile year in the last 2 decades.
Whenever this has happened in the past, i.e. whenever the market has moved in a narrow range and has generated single-digit returns, the subsequent year has been full of volatility and action.
The year 2015 was the exception. Markets continued to rumble even in 2016. However, indices witnessed big moves in 2017.
Will low volatility be followed by wild swings?
(Source: BSE, NSE, ACE Equity)
However, please don’t conclude that years with low volatility will be followed by the rewarding ones. For instance, in 2010, both the indices moved in a relatively narrow range but in 2011, the indices generated double-digit negative returns.
Speaking about 2018, 3 out of every 5 Nifty constituents underperformed the index. In contrast, almost half the Sensex stocks outperformed the 30-share index.
In other words, only a handful of stocks drove markets in 2018. Market breadth wasn’t encouraging.
Against this backdrop what will 2019 look like?
Over the last decade, markets had scaled new highs at a time when status quo was the favourite word of central bankers in developed markets. Including the likes of the US Federal Reserve (the Fed), European Central Bank (ECB) and Bank of Japan (BoJ), central banks adopted ultra-lose monetary policies, which injected massive liquidity into the capital markets.
The tide started turning when the Fed began raising interest rates in 2015 (for the first time since 2006). Despite this, equity markets in most parts of the globe climbed until 2017. Uncle Sam witnessed a robust economic rebound led by high consumer confidence, dwindling energy prices and upbeat job market data.
This late-cycle rally seems to have fizzled out in 2018. S&P 500 is down approximately 15% from its September highs. Nasdaq Composite which tracks the movement of almost 4,000 stocks is down 19%. Going by already established principles of investing, a bear market for Nasdaq Composite will start if the index extends its losses beyond 20%.
This doesn’t bode well for global equity markets.
Even after factoring in robust domestic inflows in the capital markets in India, India isn’t shielded from the trends in global liquidity. The ECB has also hinted at ending its Quantitative Easing (QE) programme. (Source: ECB). This may further fuel the fire.
According to Central Depositary Services (India) Limited (CDSL), Foreign Institutional Investors pulled out Rs 33,300 crore from Indian equities in 2018. Should they withdraw more in 2019, Indian markets will find it difficult to advance. The US has become a magnet for global capital since the Fed started raising rates.
Sell-offs in emerging markets have become commonplace.
As you can see in the above chart, Nifty has formed a typical Head and Shoulder pattern on the latest weekly chart.
The left shoulder (11,171) is higher than the right shoulder (10,985). The head was formed on August 31, 2018 at 11,760. If the markets break down below 10,004 on a weekly closing basis, then the Nifty may start its downward journey.
Going by this pattern, the Nifty might try to settle on the lower trajectory.
That doesn’t mean Nifty will break down tomorrow. It will require big negative surprises to go down so sharply.
Big surprises can be global or local in nature; at worst, there can be a combination of both.
Where might the surprises come from?
If the global liquidity dries up further and the Fed continues to hike rates, irrespective of market aversion to it doing so, global markets might take a knock. In such a scenario, Indian markets might follow suit.
Junk bonds and leveraged loans: Is the next crisis in the making?
Do you remember how a default by a subsidiary of IL&FS caused havoc in the Indian equity markets lately? The effects of corporate debt defaults across the globe can pull the carpet from under the feet of markets.
The Organisation for Economic Cooperation and Development (OECD) has already slashed its global growth expectation from 3.7% to 3.5%. Trade confrontations between Uncle Sam and the Asian Dragon might drag on even in 2019. In other words, global businesses might be unwilling to make high-ticket investments in 2019 (or until there’s clarity about the future of free-trade).
Deteriorating fundamentals, slowing global growth and a liquidity crunch would be a lethal combination for equity bulls. As far as the Indian markets are concerned, the issues can be local in nature as well.
Contrary to expectations, growth in corporate earnings in India fails to delight. You see, lack of growth makes developing market equities suddenly look highly expensive. Earnings of the BSE Sensex are likely to fall short of estimated earnings in FY 2019 for the 11th consecutive year (Source: Business Standard).
So far, ample domestic and global liquidity had masked the stagnation but as liquidity is receding, markets may choose to react differently this time.
Politics may not matter much for markets, but the political sentiment certainly does
Should actual election results deviate drastically from the expected results, markets will yo-yo. Going by cues available today, the market isn’t factoring in any possibility of the BJP losing elections. Otherwise, after BJP losing three crucial states, markets would have reacted vehemently.
Are all doors for bulls closed?
Nobody can say this with certitude! After all, bull markets rarely end with elusive corporate earnings growth.
Although Bank balance sheets are still under stress, corporate balance sheets aren’t as leveraged as they were during the peak of 2007. Inflation expectations are benign and oil prices have started falling as well.
Despite a fall in the Indian Rupee in 2018, India is still sitting on the forex reserves of US$ 393 billion (Source: Business standard). This will offer India some cushion against external shocks in 2019 and beyond.
Key takeaways for investors
For any reason mentioned above (or even otherwise) if the Nifty slips to four digits, markets might offer you some exciting buying opportunities. An index of 8,500 might reflect plenty of negatives discussed above.
The flow of negative news might continue even when the index hits 8,500 levels. But if you don’t gather the courage to buy then, you might have to repent later.
Let’s not forget, markets are always forward-looking. Novice investors take too long to realise this.
By the way, how many of you could buy equities between October 2008 and March 2009?