Year 2018 was a stormy year for investors. The imposition of Long Term Capital Gain (LTCG) tax on equities, Additional Surveillance Measures (ASM) on mid-cap companies and the mutual fund reclassification led to broad-based selling. Mid cap stocks were the worst hit! Macro challenges added to the woes. Oil prices went up sharply and that impacted the trade deficit. Government spending has already taken the fiscal deficit beyond the Fiscal Responsibility and Budget Management (FRBM) target. Above all, interest rates were rising, and a slew of companies were caught up in corporate governance issues.
But the market outlook 2019 seems optimistic…
Year 2019 brings in a ray of hope for investors for a variety of reasons. The global trade war between the US and China is limping towards a resolution. That cheers! With record US oil supply and the risk of a global slowdown, crude oil prices should be subdued. That should be positive for India’s trade deficit. Industrialists are already demanding lower rates from RBI and with an inflation rate of 2.19%, RBI is likely to relent sooner than wait.
Consumption with a focus on rural spending
Consumption stocks have done extremely well in the last year and that is likely to sustain in the coming year too. With urban and semi-urban income levels picking up, this could be the one factor to focus on. The government is expected to announce a major direct transfer to farmers and that will be a boost for rural incomes. Most consumption stories—like FMCG and consumer durables, are already in a sweet spot. Firstly, most of them are likely to benefit from lower input costs; thanks to weak oil and metal prices. Secondly, the Goods and Service Tax (GST) implementation implies a shift towards the organized sector. Thirdly, GST will also enable consumption companies to better leverage their logistics networks. In a nutshell, investors must focus on the direct and indirect beneficiaries of the spurt in rural consumption.
How about PSU banks as turnaround stories?
In the last few years, PSU banks have been in the news for all the wrong reasons. Weak credit growth, bulky structures, and a rapid growth in NPAs were the major issues. But that may be about to change! Recent quarterly numbers indicate that the non-PCA banks may see the bottoming of the NPA cycle. The NCLT process is likely to result in a huge write back of Rs.100,000 crore in this year. If the RBI also adopts a dovish stance, then PSU banks will benefit from higher loan growth and improved bond portfolio performance. It’s safe to say then that PSU banks may be the dark horses for the year 2019.
Finally, don’t ignore the mid cap story of 2019
Most mid-caps took a hit last year due to the combination of LTCG tax imposition and steep Additional Special Margins (ASM). That has almost played out. You may still have to ignore the mid-caps with corporate governance issues and the ones that are loaded with debt. But there are two factors favouring mid-caps. Unlike 2018, oil prices are expected to remain muted. That means lower input costs for mid-caps. Secondly, the rupee is unlikely to be as volatile as 2018 and a stable rupee has always favoured mid-caps.
So, well, we could say that the year 2019 is likely to be exciting with big opportunities for equity investors. But this, only if the budget does not play a spoilsport.