Calendar year 2018 (CY18) turned out to be an eventful year that saw the S&P BSE Sensex and the Nifty50 react to the rise in oil prices, fall in rupee, rate hikes, trade war fears, FII outflows, worsening macros (twin deficits – fiscal and current), confusion over long-term capital gains tax among the Budget proposals and the IL&FS crisis.
On a year-to-date (YTD) basis, the S&P BSE Sensex and the Nifty50 have gained nearly 7per cent and 4 per cent, respectively. Analysts expect calendar year 2019 (CY19) to be equally volatile for the markets with a host of global and domestic factors impacting the sentiment.
Here is a quick look at the factors that will play a key role in how the markets shape up in the next year.
Crude oil prices
Movement of crude oil prices will be one of the key determinants of the direction of financial markets. It was a tale of two extremes for the oil prices during the year gone-by. Threat of sanctions on Iran by the US and a possible cut by the OPEC saw Brent oil prices oscillate in the range of $50 - $85 a barrel during the year.
Analysts say the decline in oil prices could extend and take the prices to as low as $42 a barrel. This, they say, is on account of the markets shifting from being an oversupply zone to a balanced one after OPEC’s decision to cut output by 1.2 million barrels. “The medium-term bias still continues to remain negative as long as below $54-55 range and the current decline could extend towards $44-42 levels,” wrote analysts at Motilal Oswal in a recent report.
The domestic currency came under heavy pressure during the year and slipped 10 per cent in CY18 owing to a spurt in crude oil prices, strengthening of US dollar and selling by foreign portfolio investors (FPIs). According to reports, FPIs have already withdrawn nearly Rs 1 trillion so far in 2018.
“Key risks to the rupee comes from the government turning more populist ahead of the 2019 general elections which could worsen domestic fundamentals and a sharper-than-expected domestic growth slowdown triggering equity outflows from the country,” said Pritam Kumar Patnaik, head, Reliance Commodities.
After facing a setback in the recently-concluded state assembly elections, it would be interesting to see how the markets react to the outcome of the general elections scheduled for May 2019. Most analysts believe that elections, at best, can trigger a knee-jerk reaction in the markets. The long-term trajectory, however, will not be impacted whatever the outcome is.
Credit Suisse in its recent report says: “General elections, going back two decades, have had no visible impact on market direction. But the upcoming elections in Apr-May 2019 should keep noise levels high. Further, agriculture is likely to remain a source of distress for 200 million workers for several years: this can cause political churn and also policy experimentation (so more uncertainty).”
Health of the economy as measured by inflation, trade data, fiscal and current account deficits (CAD) and gross domestic product (GDP) numbers will also be key elements that the markets will keep a tab on. Going forward, analysts say trade deficit could moderate further if the recent decline in oil prices sustains. “Export growth is likely to face headwinds in an environment of slowing global growth and escalating trade wars. We expect the CAD to average 2.6 per cent of GDP in fiscal 2019, compared with 1.9 per cent of GDP in fiscal 2018, said a CRISIL report.
Other Global Cues
On the global front, investors will track the Brexit deal. The United Kingdom (UK) is expected to leave the European Union (EU) on March 29. Though the event does not impact India directly, it may, however, have a bearing on the global financial markets. That apart, trade war tensions, global growth, policies of global central banks such as the US Federal Reserve (US Fed), Bank of Japan, European Central Bank (ECB) and the Reserve Bank of India (RBI) will play a key role.