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Will equities outshine other asset classes in Samvat 2074?

In the coming year, equities could come off initially due to reasons like delay in corporate earnings revival

Deepak Jasani 

Samvat 2074

The equity proved a good asset class for investment in Samvat 2073, with the rising about16 per cent until October 9, 2017. But will the golden run continue in the coming Samvat as well? Deepak Jasani analyses for Business Standard.


Equities have had a good run in Samvat 2073, with the rising about16 per cent until October 9, 2017. Debt markets have given muted returns as the benchmark 10-year yield has remained flat at 6.7-6.8 per cent between the two dates. Interest rates for fixed income investors have also softened through the year. Even gold prices have not moved much over this period. Realty prices have either remained flat or softened.
 
Other developed markets did even better in terms of equity returns last year. This, along with the possibility of an interest rate rise across the globe and a strengthening dollar could mean that FII flows might be flat to negative in the initial part of the new Samvat.
 
In the coming year, equities could come off initially due to a host of reasons. These include the delay in revival of corporate earnings which may not happen for another 1-2 quarters. Liquidity withdrawal and its strong signs by US, Japan and lately UK and euro zone could create jitters among the equity investors who have entered into an arbitrage trade. The re-rating of in India and even globally over FY2011-16 has largely been driven by the decline in global bond yields. If global bond yields were to move up from current levels on the back of global economic recovery, this process of rerating would come under threat and reversal.

Local flows have been encouraging so far. However local flows depend on how markets do. Flows follow returns, not the other way round. Hence we will have to track the progress of the flows when markets don’t provide any meaningful return over 3-4 quarters.

Uncertainty exists about direction of policy in China, Brexit negotiations, rollback of monetary stimulus in EU and the quantum (and time) of US monetary and fiscal policy. In addition geo-political issues like North Korea also keep impacting sentiments.
Fiscal deficit numbers do not enthuse confidence (India's fiscal deficit at August-end touched 96.1 per cent of the budget estimate for 2017-18 vs 76.4% last year) even as GST, RBI dividend, divestment and telecom receipts estimates may see some shortfall and additional fiscal stimulus of Rs.50,000 cr may bring additional pressure on the deficit. The recent cut in excise duties on Petrol and diesel could result in ~Rs.13,000 cr impact on fiscal deficit for FY18.
While the could correct sharply in the early part of the coming Samwat, it could later revisit the highs and make an attempt to breach them.

Debt markets could remain lackluster as ample liquidity and slow growth in credit demand will keep a lid on interest rates, while forex situation (including current account deficit and FII flows) could provide a floor to the interest rates. Gold prices seem to be on the up globally and hence could see some follow through in India (subject to USDINR rates).
 
Themes that will dominate next Samvat

In India, Healthcare underperformed through the last year (index down 18%) though they seem to have formed a bottom in middle of August. IT did nothing through the year. It was a superlative year for commodities (Metals, Basic materials, Oil & Gas), Realty and Consumer Durables   It was a year of discovery of Smallcap as many of them rose sharply due to rerating to catch up on valuation difference, restructuring and other measures adopted by the promoters.
Auto, Metals could continue to do well, Realty could be a dark horse while Healthcare could make a comeback in the coming Samwat. Insurance could remain in demand as investors grapple with the right way to value them (and the multiple thereof) in an economy like India.
 
Advice on Muhurat trading

While it is considered auspicious to trade on Muhurat day, it can only be of token quantity due to the shallow and wide bid-ask spread in trading for short period on the Muhurat day. One can buy any of the shortlisted in a small quantity to adhere to the traditions.
The author is head of retail research at HDFC securities

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

First Published: Mon, October 16 2017. 11:20 IST
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