After a volatile and lackluster 2018, the stock market is interestingly poised as the New Year begins. The volatility is likely to continue in the first half of 2019; but the prospects for investors look bright. As always, there are areas of concern and bright spots for the economy and market. Let’s look at the major trends, briefly.
Global economy set for a slow down
After impressive growth in 2018, global economy is likely to slowdown in 2019. The US, which re-emerged as the engine of global growth, has been on the second longest period of economic expansion in US history and appears well set for the longest expansion in US history; but a slowdown appears imminent. The flattening of the yield curve in US indicates slowdown. Global PMI in December, at 2-year low, is another indication of an imminent slowdown. However, the consensus is that a recession is unlikely.
Even though this ‘growth scare’ is a negative, it has positive implications for stock market performance in Emerging Markets (EMs) like India. The growth slowdown is likely to turn the Fed’s monetary policy stance dovish in 2019. The Fed has already trimmed the number of rate hikes they foresee in 2019 from three to two. The sharp dip in US 10-year yield – from the peak of 3.26 percent in October to around 2.8 percent by end December- has stemmed capital outflows from EMs. The declining yields are likely to trigger increasing capital flows to EMs like India. The EMs are likely to outperform Developed Markets (DMs) in 2019. This augurs well for the market.
RBI will cut interest rates in 2019
The crash in crude and soft food prices have brought inflation well below the RBI’s comfort zone. The central bank expects inflation for the second half of FY 2019 to range between 2.7 to 3.2 percent. With CPI inflation declining to 2.33 percent in November and Repo rate at 6.5 percent, the real interest rate is way too high. Therefore, the RBI is likely to cut interest rates in 2019. The softening of the bond yield (the 10-year is at 7.32 percent as I write) is clearly indicating this emerging monetary scenario. This is positive for the stock market.
Crude crash is a strong tail wind for the economy and stock market
The expected global economic slowdown has already impacted the crude price. The US slowdown, along with decelerating Chinese economy and increasing shale supplies from the US will put a firm lid on crude price. Though this is a negative for international trade and global growth, it is a major tailwind for the Indian economy and stock market.
Corporate profit growth to improve in 2019-20
Projections of earnings growth have been consistently proved wrong during the last four years. The huge losses of PSU banks, the miserable performance of telecom and aviation and the woes of the metal segment contributed to this lackluster performance. PSU banks are likely to report profits in FY 20 and the earnings of aviation and metal sector are set to improve. There are clear signals of improving prospects for the capital goods segment. All these point to a smart pick up in corporate profits in FY20. The stock market will start discounting these positives well in advance.
Volatility from political uncertainty will be temporary
The political scene has turned unpredictable after the recent State elections. Presently, there is no clarity on the 2019 Central election outcome. It is important to appreciate the fact that in the long run election outcomes are not very significant. In India, coalition governments have delivered superior growth. If the election outcome is a shaky coalition government, that can turn out to be short-term disruptive for the market. But eventually, the market will find its own level and will be driven by earnings growth.
Profit from volatility
In 2017, globally, stock markets were unusually stable and highly rewarding. 2018 proved to be very volatile with poor returns. 2019 is likely to be volatile with decent returns. The best strategy to gain from this dynamic environment is to buy quality stocks on dips and through Systematic Investment Plans (SIPs). SIPs in good equity funds and hybrid funds would be a good investment decision. This is the time to scale up SIPs. Debt funds will also do well since interest rates are expected to decline.