ALSO READMarket outlook 2018: Morgan Stanley more bullish on China than India Property, gold back on radar Investors should become more selective on mid-caps now: Andrew Holland Markets not expensive, earnings should improve, say top fund managers Mid-market remains under-served by mainstream PE: Siddharth Parekh
With government policies set to tilt more towards the "stress-ridden rural landscape" next year in the run-up to the 2019 Lok Sabha elections, the Indian economy may reach a 7 per cent growth in 2018 while recovering from the lingering effects of demonetisation and GST, industry chamber Assocham has said. India is the third-most preferred equity market among EMs after Brazil and Mexico for 2018, according to a Bloomberg survey of traders, strategists and investors. This author discusses the stock market outlook for next year. Indian retail investors have taken to equity markets (directly as well as through the mutual fund route going by the growing number of inflows) post demonetisation, due to lack of other attractive investment avenues. Markets are awaiting resolution of the first large case under the Insolvency and Bankruptcy code, which is taking longer than expected. This could be a positive trigger for both the lenders and the troubled sectors. Retail investors would do well to stick to their asset allocation plans, review their small and mid-cap holdings closely and bring down their return expectations for the next few quarters. In 2018, mid-and small-caps will keep throwing up surprises based on their size/base, faster adjustment to emerging changes, financial and operational restructuring, corporate announcements including merger, demerger, hive-offs, turnaround, asset value unlocking etc. FIIs seem to have again become bullish on India post the PSU Bank recap plan announcement, which is likely to provide greater avenues for lending to banks and enable them to take bigger haircuts on stressed assets, push forward the resolution process and set the stage for a capex cycle recovery in the medium term. On the other hand, Indian bond yields have hardened in recent months.
As far as the equity markets are concerned, the focus may slowly shift from liquidity to earnings.Investment in road sector has multi-fold implications and can materially revive the capex cycle along with potential acceleration in housing, railways and defence apart from assuring higher revenue growth for EPC players with superior execution capabilities. This will have a significant impact on the stock market. That said, the biggest area of concern would be worsening macros, delay in resumption of GDP growth and sustained interest rate rise in developed economies. Another issue for worry is whether the markets have fully discounted all the India positives in advance and is going overboard on valuation just based on expected unending inflows from global/domestic sources. Globally the risk of sentiment is alive. And a lot of the developed markets are witnessing “rational exuberance”. However, there is some uncertainty on the timing, pace and quantum of interest rate hikes to be conducted by the central banks globally. With national elections due in May 2019, the government has refocused on growth going by its recent actions of fuel tax cuts, raising import duty on agriculture commodities, GST rate rationalisation, higher MSP hikes and bank recap plan. Though coupled with the near-term pain of higher fiscal deficit, these initiatives could put India on an accelerated growth trajectory FY19 onwards. Dhiraj Relli is MD & CEO, HDFC Securities