MARKETS IN 2018

Find out about the surprises stock and bond markets have in store for you this year.

Till the end of CY2017, money was up for grabs, and plenty of it, even if you were not an extremely savvy investor always picking the right stocks and timing things right. A back-of-the-envelope calculation reveals nearly 90 per cent of the BSE 500 stocks posted positive returns last year. It means had you randomly picked up 10 stocks, nine out of those 10 were sure to ring the cash register. The markets had entered the Goldilocks phase at the time; there was low volatility or choppiness, and returns were high. Most mid-cap and small-cap indices returned huge profits. But now a string of events, along with already sky-high valuations, has made the stocks jittery. Since the beginning of

CY2018, markets have seemingly entered choppy waters, and investors who have come in late are seeing a sea of red in their portfolios. The Sensex has tumbled nearly 2,670 points or 7.2 per cent from its peak in January this year. Ditto for other indices such as the BSE Mid-cap and the BSE Small-cap that have skidded 10.5 per cent and

12 per cent, respectively. In other words, it is a new phase in the market where people have to ask the right questions before investing. Ask yourself if it is a crash or correction, a new trend setting in or some minor volatility that has always plagued the market. Should you invest more now? Has the market become riskier or has the correction brought stocks down to comfortable valuation levels?

Pricey Equities Are Dicey

Of all the factors driving the market, valuation is still a major cause of worry. Despite earnings downgrades, markets kept scaling new highs, largely fuelled by liquidity, taking Nifty valuations to 18-19x its FY2018/19 estimated earnings, which is slightly above its long-term average of about 17x earnings. Even on broader parameters like the market cap-to-GDP ratio, now at 90 per cent of 2017/18 estimated GDP, valuations are way beyond comfortable levels (see chart Trend in India’s Market Cap to GDP).

India is not alone. Globally, Shiller’s cyclically adjusted price-to-earnings or CAPE ratio (a valuation measure usually applied to the US S&P 500 equity market) at current levels of 32x is much higher than the past average of 15x or that of 27x, seen just before the global equity market crashed in 2008. Increasing valuation risks across the globe only add to India's woes as the markets here will be in step with others.

Flashes of Amber, Globally

Apart from valuations, markets are increasingly factoring in risks of higher crude oil prices. With global commodity prices soaring, including crude oil prices, investors are weighing inflation risks. Consequently, global bond yields have spiked, with the benchmark U.S. 10-year Treasury yield hitting a fouryear high at about 2.9 per cent. Rising US bond yields could have its implications on foreign inflows, which have been the prime source of optimism in the past. Imposition of long-term capital gains (LTCG) tax by the government in its recently concluded Union Budget has only compounded foreign investors’ worry. During 2017, foreign investors put nearly $7.7 billion in the Indian equity markets compared to $2.9 billion in 2016 (see table Investments and Money Churners). Assuming part of it is merely tactical money, any outflow or change in views will cause volatility. Foreign institutional investors, or FIIs, have already caused huge volatility by selling close to $1 billion of their investments in the Indian equity markets. However, experts are still expecting robust inflow. “After 2008, we never had a year of negative inflow. We could have a lesser inflow but not a negative one. We anticipate a robust inflow on the back of rupee appreciation and the India growth story,” says Harendra Kumar, Managing Director