Earlier we had written in the same column ("2018 is the year of investment" on May 22, 2018) that the year of 2018 is likely to be only a year of investment. The Sensex is up just around 6.5% from the beginning of 2018. However, this is largely on account of just 10 large cap stocks seeing nearly 20% jump in their combined market caps. Remaining stocks lost a whopping Rs 21 lakh crore of market cap since the middle of January 2018. Nearly 600 stocks (about 1/3rd of actively traded stocks) have lost more than 50% of their market cap from their respective 52-week highs in 2018.
Oil price is down 28% from its recent record high and it is unlikely to spurt substantially once again as global growth has slowed down – there are reports of contraction in the GDP of eurozone and Japan. Growth in both the US and China has also moderated. If Brent oil stays below $60 a barrel the same would induce India's industrial growth, moderate inflation and also strengthen the external trade balance.
Bank credit continues to grow in double digits and recent monetary decisions of the Reserve Bank of India (RBI) remain conducive to the banking sector. Any possible decision by the RBI to transfer financial resources to the central government would provide a solid boost to the aggregate demand in the system and also to the markets. The RBI is unlikely to hike the interest rate in the short-term as India's growth slowed and even the US Fed might go slow on its proposed rate hikes. The rupee has strengthened by nearly 5% and it is likely to stabilise or even appreciate if oil falls further.
Thanks to the improvement in the external economic front, the foreign portfolio investors (FPIs) invested a net sum of Rs 12,260 crore in the debt and equity instruments. This was the highest inflow since January when FPIs had put in Rs 22,240 crore in the capital markets. We can expect further improvement in the inflow of foreign capital and the same is likely to peak outpost general elections in 2019.
Hence, the year 2019 is likely to be a year of wealth creation and it is likely to be from the quality small and mid-cap stocks, which were battered down in 2018. The only risk to this optimistic view would be any possible political scenario where neither of two national parties fails to secure more than 220 seats in the Lok Sabha.
Forthcoming state elections do not matter much for the markets as the outcome cannot be taken as a final judgement for the General (Lok Sabha) Elections as the objectives of these two elections are largely different. In the worst possible scenario, there could be a knee-jerk reaction on the eve of state election results, but the same could be used as an opportunity to accumulate the stocks.
The writer is founder and managing director at Equinomics Research and Advisory
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