Slow and steady

Markets unlikely to spring nasty surprises

Last year was a rewarding one for equity investors. Every global market saw a bull run. The Nifty had capital gains of 28 per cent since January 1, 2017 (31 per cent in dollar terms); the Nifty Midcaps 100 index was up 44 per cent and the Nifty Smallcaps 250 index was up 53 per cent, courtesy the highest-ever investments by mutual funds and supportive global portfolio flows. The primary market was buzzing, with 120-odd initial public offerings picking up Rs 750 billion in subscriptions. The trend was in line with the markets elsewhere. America’s Dow Jones Industrial Average gained 24.5 per cent, while the Eurozone’s benchmark FTSE 100 was up 24 per cent, Japan’s Nikkei 225 was up 23 per cent, and South Korea’s KOSPI was up by 35 per cent. China was an underperformer — Shanghai gained “only” 12 per cent. The bull run was driven by high liquidity and First World growth recovery. The US economy is humming along in top gear; Japan has seen its best growth in two decades. The European Union, too, has experienced its highest economic growth since the global financial crisis. 

India’s rally received additional impetus from retail participation. The Assets Under Management (AUM) of equity funds (including ETFs and ELSS) swelled from Rs 5 trillion in January to Rs 8 trillion in November. Retail investors own just under half of that AUM and around 800,000 new systematic investment plans are being opened every month. In addition, many individuals have invested directly in equity — this has driven the rally in small caps. The mutual fund contribution exceeds the combined contribution of foreign portfolio investors (Rs 500 billion) and Other Domestic Institutions (Rs 820 billion). There is only one fly in the ointment for Indian investors — low earnings growth. Between Q2 FY17 and Q2 FY18, the Nifty’s earnings rose just 5.5 per cent. As a result, the Nifty is trading at a price-earnings ratio of over 26 while mid-caps and small-caps are trading at PEs above 35 and 53, respectively. 

Hopes of a corporate rebound have kept investors interested and rising share prices have also created a wealth effect, which has attracted more rounds of investment. However, if there isn’t an earnings rebound, there could be a correction. But an earnings rebound will depend on higher consumption and more private sector capital expenditure. Both variables are weak, even going by the latest quarterly data. It's also true that the market is unlikely to give great returns at such expensive levels and a sharp upswing, therefore, may remain just a hope.

The redeeming feature is that the Indian markets have not been just a one-way street as the bull run has taken breaks in between, raising hopes of its sustainability. Also, despite the global growth recovery, FPIs are unlikely to move out as there are few alternative markets that can give such decent returns. The markets, of course, have several expectations from the government. For example, policy must deliver on multiple fronts to kick-start capex and encourage consumption; the changes in the GST regime have to stabilise; and more importantly, the Union Budget, which is showing definite signs of fiscal slippage, has to send reassuring signals to investors by avoiding temptations to go populist for electoral reasons. Investors will keep their fingers crossed till the D-day.