Market’s short-term rally is looking positive as the downtrend in crude prices is having a positive impact on the domestic fiscal. Additionally, India’s earnings downgrade post Q2 results is over and valuation has got more rationale with a positive outlook from H2FY20 onwards. The sudden fall in oil prices from a peak of $86.7 due to increased supply from US and limited effect of Iran sanctions. In the near term oil prices can bounce from current levels given an expectation of production cut by OPEC in December meeting, however, on the slightly longer-term perspective we expect oil prices to trade lower since supply is likely to increase. Expected volatility in oil prices during December, FOMC meeting in the same month and outcome of upcoming state elections and the national elections next year may be a worry in the near-term. The most important factors which can define the outlook of emerging markets like India will be global trade war situation, pace of interest rate hike in the global market in CY2019 and degree of slowdown in the world economy.
RBI is likely to keep the key policy rates unchanged at the monetary policy review meet on 5th December. Robust agriculture production, softening of vegetables and fruits prices and the government’s new procurement policy will help in keeping the food inflation under check. Risk emanating from crude prices has eased, CPI inflation is expected to be under the control range, RBI is likely to lower its inflation forecast. The return of foreign investors to Indian markets, stability in rupee, strengthening of industrial production and benign inflation have supported expectations of economic growth revival in the future. However, bad assets and tightening of non-banking regulations might lead to disruptions in the short-term.
Post Q2 results, market has cut the earnings growth of FY19 from 20% to 15%. The actual growth of Nifty EPS in H1FY19 has been around 5% to 7% with a further risk of downgrade in Q3 and Q4 given the near-term headwinds in the domestic and global economy. At the same time performance of the market during the year has been muted, due to which valuation has also got rationalised, one year forward P/E has reduced from 19x to 16.5x. Given the fall in quality of earnings during the year, results are unlikely to surprise in the short-term but given a correction in valuation and tailwinds from fall in oil prices, the extent of impact may be limited in the short-term.
We believe that large-caps provide a better chance of investment in the long-term given the healthier risk-reward ratio. Whereas mid and small caps have the higher risk of downgrade in earnings and valuation in the future. Certainty and stability in business will be the key for the market to outperform in the current situation. FMCG and consumption oriented, IT and possibly pharma too, assuming that the worst is over in terms of pricing issues in the US market. At the same time, we also feel that export-oriented stocks and sectors like chemicals and auto ancillaries can also do well. The sectors which are likely to be under pressure in the near-term are ones with lack of financial stability such as financials, NBFCs and infrastructure.