2018 to remain year of investment, trends show

The Indian equity market has lost nearly Rs 12 lakh crore of market cap from its record high value of over Rs 157.50 lakh crore seen in January 2018 to around Rs 145.69 lakh crore on Monday. In the last three months, just five large-cap stocks (like TCS, HUL, etc.,) alone added over Rs 3 lakh crore of market cap while three initial public offerings (Bandhan Bank, ISEC and HAL) added another Rs 1 lakh crore of market cap.

This means that over 4,000 actively traded have actually taken a major hit from over Rs 16 lakh crore of wealth erosion from the January 2018 peak values. Over 10% of small and mid-cap stocks (around 400 stocks) have lost about 30% to as high as 90% since January 2018.

This steep fall in the market cap has been caused by a spike in the oil price and to some extent by the final outcome of the Karnataka state election. In some individual cases, it was also due to governance issues, frauds and aberration in the valuation multiples. What matters to the stock market is whether people’s mandate indicates any scope for political stability at the Centre, not the verdict of the MLAs in selecting their leader which purely remains as an issue of political significance. Still, the market has panicked and corrected significantly. It might take a couple of weeks for the market to forget this election.

However, the extent of wealth erosion especially in the small and mid-cap stocks is so huge and hence, it could take few months for many retail investors to recoup their investments and come back to the markets with fresh capital. The rupee is also weakening continuously and it has fallen over 6% year-to-date. Unless oil price stabilises and shows some signs of moderation, the rupee is unlikely to stabilize and also improve soon. This would mean that the foreign investors may not rush to the Indian equity markets unless they gain some confidence in rupee as any further steep fall in rupee exchange rate would reduce their dollar returns.

Crude oil price is likely to moderate before the end of 2018 as the US has been constantly increasing its output and the recent spike in oil price has already started impacting major oil importers like India. High oil price is not good even for the oil producers as the same would ultimately bring down the demand and then prices of oil. So, oil is likely to stabilise first and then correct before the end of 2018.

However, unfortunately by the time we hope for some relief from soaring oil price and falling rupee by end of 2018, the markets would have to face once again political uncertainty and volatility arising from the elections lined up for two major states viz., Madhya Pradesh and Rajasthan in December. Thus, a lot of volatility is in store for the Indian markets throughout 2018. However, post-general election, the year 2019 could possibly create significant wealth from the equities.

The writer is founder and  managing director, Equinomics Research and Advisory