What events can unfold in 2019?

The year 2018 ended with a disappointing note for the stock markets. Most markets in the world declined anywhere from 8% to as high as 25%. Though the Indian market outperformed in relative terms most global markets in terms of broad indices (like Sensex and Nifty), the overall market lost around Rs 15 lakh crore of market value year-to-date in 2018. Trade war initiated by the US ignited deflationary pressures worldwide which led to around 40% fall in crude oil prices and up to 27% fall in metal prices, apart from significant fall in the equity markets. In this background what could unfold in the world economy and also for the domestic equity markets in 2019?

Early 2019 could see a further rise of deflationary pressures as the consequences of an ongoing trade war. However, by the middle of 2019, the deflationary pressures would start receding as both the US and China are losers of the trade wars as their GDP growth slowed down. Further, there is no improvement in US trade balance despite a steep hike in import duties. Hence, global oil and metal prices might stabilise and also improve at least 10-15% by the middle of 2019. Brent oil is likely to stay around $60 a barrel in most part of 2019 which would be still cheaper to India as compared to a recent record high of over $86 a barrel.

Consequent to the deflationary pressures and moderation in inflation, the US Fed is likely to avoid any significant rate hikes in the first half of 2019. Compromising solution for the trade wars, modest oil price and, stability in the inflation and interest rates are likely to reverse the declining global growth in the second half of 2019. Both Japan and the European economies are likely to come out of contraction to some growth from the middle of 2019.

On the domestic front, with a modest outlook on global inflation and stability of interest rates in the US, we can expect further improvements in the flow of foreign direct investments into India. The same could improve the rupee exchange rate. India too is expected to enjoy modest inflation and lower interest rate regime. We can hope for support from the Reserve Bank of India (RBI) to the government at least to the extent of compensating the government for the recent past recapitalization of public sector banks (PSBs). This move could allow the government to spend a lot more on developmental outlays. Lower interest regime and modest oil price would eventually spur private investments as well.

In the last 10 years, several times global factors scared the domestic investors but eventually, the Indian equity markets rewarded the long-term investors. This time too, fear from the global macro environment will fade away. Only any possible major instability of the Union Government could cause a short-term bear phase. Otherwise, the domestic equity market is set for a minimum 15-20% return in the year 2019.

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