Nikunj Gandhi explains what the New Year has in store for equity investors and wealth managers
As we venture into the realms of the New Year, we tend to foresee it as an opportunity for new beginnings. New resolutions are made with an optimistic view and full gusto and the brave ones persist towards it till the end. Gauging by the past performance, 2018 opens up an opportunity to plan our finances and make some resolutions to benefit the most from a thriving economy. It would be foolhardy to continue viewing this bull run from the spectators stand than being an active participant. However, it does not mean we take a plunge when the valuations have hit the roof. However,a systematic strategy for investments can go a far way by tracking down undervalued stocks which may not have been an active participant in this bull run and devoid of any speculations.
Since we are deprived of any fictional inventions like the time machine or relying on the predictions of a soothsayer, the best we can do is make our projections and estimates on the basis of an informed judgement. An immediate outlook on the domestic and global events can help us in determining the course of the markets and plan our investments accordingly.
Equity, as a class of asset, had outperformed its peers in the previous year and a common consensus remains to stay overweight in this asset class in anticipation of a robust improvement in earnings. As the global markets surged above its potential, the Indian markets displayed a subdue performance by being mired by disruptions from the effects of demonetisation and GST implementation. However, it is expected to catch up to its global peers if it continues on its growth trajectory.
Global events to be considered:
There is not much divergence in the analysts’ and economists’ views about the global macroeconomic outlook for 2018. The near consensus view on global macroeconomic conditions can be summed as follows:
(a) As the fiscal and other drags created by the global financial crisis fade away and normalization process accelerates further, the US economy may continue to deliver robust growthalthough it may peak around 2.5%, much below the previous normal level of 4%.
(b) The Japanese economy has finally returned to steady growth after a prolonged slump. GDP growth has stayed at about 1% for three consecutive years since 2015. The growth may remain close to this level for next couple of years.
(c) The growth in Eurozone may remain firmly on the recovery path, even when ECB begins to taper from January 2018. The zone may however see higher political volatility, with the Italian elections in fray.
(d) The export based economies of Asia may extend the stronger growth seen in past couple of quarters, well into 2018. China may continue to defy the call for a hard landing and grow close to 7%.
(e) 2018 will see an acceleration in the process of normalization of unconventional monetary policies adopted in the previous year. The net QE may drop to almost zero by the end of the year. US Fed may hike 3times in 2018, but other central banks in developed world are not expected to follow suit. Asia may see further tightening of rates with China and Korea taking the lead.
(f) As the US Tax reforms get implemented, fundsinvested outside by US corporations may fly back to US. This may see USD strengthening, mostly at the expense of emerging currencies.
(g) While the general consensus favors equities in the developed markets, the opinion is divided on emerging market equities.
Domestic events to be considered:
(a) The consumer inflation may continue to remain above the RBI target of 4% for most part of the year. The core inflation may rise on the back of higher raw material prices and wages. Imported inflation shall remain elevated as global commodity prices remain strong.
(b) The government may persist with FRBM targets compromising with public investment and consumption. Expect the present trend of delay in payment of subsidies, tax refunds and contractors’ payment to continue in 2018 as well. The systemic liquidity may thus remain constrained most part of 2018.
(c) Expect benchmark yields to average above 7% for the year. RBI may hold policy rates during 1H2018, but if inflationary pressures persist a hike could be considered. Deposit rates may firm up further as systemic liquidity remains tight.
(d)Expect current account to worsen on the back of rise in energy import and sluggish export growth.
(e) Household saving may grow at slower pace as real wage growth remains poor. Corporate savings though may be higher due to continued deleveraging and rise in free cash flows.
(f) The government investment expenditure may see some slow down due to fiscal constraints and higher allocation to social sector ahead of elections. Private capex may see recovery in some sectors as like consumption and commodities. Poor capacity utilization may however keep overall investment growth under check.
(g) USD-INR may remain stable as higher yields continue to support inflows. Funding BoP should not be a problem at all.
(h) Expect higher rates to hit real GDP growth in first half. In 2H2018, we may see growth recovering to 7.25% as GST benefits begin to kick in.
Any improvement in equity returns from this point onward will have to be driven entirely by earnings growth.The corporate fundamentals would need to show material improvement over next 9-12 months to sustain the present valuation levels. As growth and employment peak worldwide, the global economy is more likely to see slower growth (with higher inflation) than to relive the “Goldilocks” conditions of the 1990s.
For 2018, the broad consensus expects global economy to continue to have strong synchronized growth along with steady inflation. Indian economy is on the cusp of strong cyclical recovery. High frequency data in the last couple of months has improved, suggesting the economy is finally shrugging off the drags from demonetisation and GST. Overall consensus expects growth recovery to be led by consumption while capex growth is expected to recover more gradually.
2017 has turned out to be one of the best years for Indian investors. Indian equities surely trade at slightly above fair valuations. However,in anticipation of improving prospects and benefits of structural reforms flowing into the economy, benefits are surely to be reaped by staying positively invested in The Great Indian Story!
Nikunj Gandhi is an Equity Investor and can be reached at [email protected]. These are his opinions and not necessarily of the newspaper’s.