Samvat 2074 ends on rocky note as resurgent market runs into rough weather

Monetary tightening by central banks, global trade tensions and worries surrounding slowdown in world economic growth led by China are some of external factors that could keep markets on tenterhooks

Barring the last two months, most part of Samvat 2074 has been rewarding for stock market investors. In the first 10 months of the Hindu calendar year, the benchmark indices gained 15 per cent and climbed to all-time highs helped by strong inflows in mutual funds (MFs) by domestic investors. The sell-off in September and October, triggered by a mix of global and domestic concerns, saw the S&P BSE Sensex and the Nifty50 wipe out the entire gains made during the year.
 
As the markets usher into Samvat 2075, most of the concerns continue to linger. Monetary tightening by central banks, global trade tensions and worries surrounding slowdown in world economic growth led by China are some of the external factors that could keep markets on tenterhooks. On the domestic front, worries of widening current account and fiscal deficit amid rising crude oil prices and rupee weakness, sluggish corporate earnings growth and expensive stock valuations are keeping expectations in check. Also, the NBFC liquidity crisis triggered by the default at IL&FS has dampened investor mood.
 

As the just-concluded Samvat started well but ended on a rocky note, the coming year threatens to be volatile, at least until the big event—2019 General Elections—is over. Besides, the market direction will also be dictated by other factors such as oil prices, US dollar and bond yield and overall liquidity conditions. The results of forthcoming State elections will also add to the volatility.
 
Most analysts expect equities to be range-bound for most part of the year. Full-year returns, they believe, could be in low single-digit.
 
Given the multiple headwinds, most brokerages have scaled back their one-year Sensex and Nifty
targets recently. Nomura has cut its 12-month Nifty target to 11,270 from 11,900. Goldman Sachs too recently downgraded its stance from ‘overweight’ to ‘marketweight’ saying elevated valuations make risk-reward for the Indian markets less favourable. Edelweiss also expects Indian markets to be range-bound over the next 12 months, with Nifty50 gyrating between 9,800 and 10,500 ahead of the General Elections in May next year.
 
A key worry for the market continues to be the pull-out by foreign institutional investors (FIIs), who have been the key drivers for Indian equities in the past few years. The flows that had made their way into emerging markets (EMs) during benign liquidity conditions are finding their way back into the US. This follows the rate-tightening path taken by its central bank, the US Federal Reserve. The high yield on the 10-year US Treasury has dimmed the appeal of risky assets such as equities.
 
During Samvat 2074, FIIs pulled out Rs 255 billion from domestic stocks. While mutual funds (MFs) provided buying support to the tune of Rs 1.4 trillion, it wasn’t enough to prevent a sharp correction in the markets. While flows into equity MF schemes have been strong, there are concerns that they could be moderating.
 
“We do not expect the recent liquidity squeeze to turn into a prolonged credit crunch, though the era of easy money of the last three-four years is behind us. Two risks remain: will Modi win in 2019 and retail flows into mutual funds,” says Gautam Chhaochharia, head of equity research, UBS Securities India.
 
Market players say election will be a key theme for the markets in the coming year. Starting with next month’s State elections, market players will look for cues of a change in political winds.
 

The market has got de-rated as the Nifty now trades at 16 times its one-year forward earnings estimate, down from 20 times in August. While the current valuations are close to long-term averages, market players don’t rule out valuations dropping further if election results spring a surprise.
 
“Valuations can undershoot in the near term in an event we get an unstable outcome in next year’s election,” says Mukul Kochhar, head of institutional sales (India), Investec Capital. “For the market point of view, any stable government formation is a positive. As of now, the only stable possibility seems to be a government headed by the BJP. If another stable outcome emerges, that is also not too bad.”
 
“The markets are not going to be at all calm about elections…(they) are going to be all over the place,” said Ridham Desai, head of India research at Morgan Stanley. The market has not yet priced in a fragmented coalition result. If that happens, it will result in significant volatility, he said.