Market Outlook
Column
The Forecast is Stormy For Indian Investors
Arindam Chanda
Despite strong GDP projections and higher corporate sales , domestic inflation and political risks will rule rest of 2018
A quick rally of more than 450 points in Nifty in contrast to the rate hike by the Reserve Bank of India ( RBI ) after four years sets a perfect stormy background this monsoon for bulls and bears to fight for their glory . With political temperature about to soar , rest of 2018 will be challenging for investors . While multiple factors are behind this recent rally , the chief architect was the IT sector with improved business landscape and a depreciating rupee . Consumption stories , pharma and banking heavyweights , primarily private banks , played their support cast in an emphatic way .
Domestic flows continued unabated with net buying by mutual funds at `13,691 crore in May 2018 , a jump of over 21 per cent compared to April 2018 . After a strong set of GDP numbers , the central bank maintained the GDP growth rate at 7.4 per cent for FY19 . We also witnessed consistent corporate sales growth over the last couple of quarters when we look at a mixed stock universe of more than 2,600 companies under our study .
With such tailwinds now , the market is climbing the wall of worries which are emanating from global macros . On 13 June , US Fed hiked rate for the seventh consecutive time has pushed up the dollar further , as the US economy appears in great shape . Commodity prices are up significantly owing to increase in demand . Dollar ’ s positive correlation with crude price poses double whammy for India . Our current account deficit ( CAD ) has climbed to $ 13.5 billion in Q3 FY18 , up from $ 8 billion the previous year and 7.2 per cent in the previous quarter . When we look at bond equity earnings yield ratio depicting spread between earnings yield and bond yield , we find that it has been widening
Any RBI rate hike will have a negative impact on economic recovery since 2016 . This raises question on equity valuation .
Domestic inflation is at four-month high with the Consumer Price Index touching 4.9 per cent . If we look at core inflation at 6.17 per cent in May , it is a 45-month high which excludes fuel and food prices . This can be extremely volatile in times to come . With elections nearing and fuel prices at record levels , general price indices may remain stubborn for rest of 2018 . The anticipated state largesse to the public in the run-up to election can also result in higher physical deficit . RBI , with the recent rate hike appears to be playing a Fed and stay ahead in the curve , thus all the above possibilities open a window of further rate hike in 2018 . This will have a negative impact on economic recovery , as even now small and mid-cap universes are reeling since demonetisation . Small cap companies have seen their toplines and margins decline in the last few quarters .
The market canvas , thus , clearly highlights sectors such as IT , metals and pharma as the players . Better economic growth in key export markets with strong dollar sets the backdrop for IT outperformance . Domestic steel continues to be strong both in supply and demand , and FMCG is witnessing good traction on account of revival in rural demand , GST benefits and stabilising of distribution channels . Monsoon will be critical for many such stories . Key large caps such as Infosys , HCL Tech , Tata Steel and ITC will be good bet for these favorable sectors .
With record US oil exports to major Asian economies threatening traditional suppliers , we may finally see oil cooling off for the time being . This may give our market the required ammunition to conquer the previous high of 11161 Nifty level . I believe a new high is more likely to be a reality in the first half of FY 2019 rather than towards the end of this financial year , when political risks along with yield curve may keep the market hostage for a considerable time .
The author is CEO , IIFL Securities
46
Outlook Money July 2018 www . outlookmoney . com