2019: Great year to pick stocks

Money Times - - Bazar.com -

The year 2018, which was one of the most event­ful in re­cent times, ended on a mixed note. Though the Sen­sex af­ter scal­ing all-time highs could barely man­age a 5% YoY rise. What the mar­kets had gained till Septem­ber was lost in two months from mid-Septem­ber to early Novem­ber. The large-caps, small-caps and mid-caps bled pro­fusely. Though the large-caps found a way to sta­bi­lize, the mid-caps and small-caps did not find the same sup­port. While the S&P BSE 200 and S&P BSE 500 in­dices closed 2018 with 1% and 3.65% losses re­spec­tively, the S&P BSE Mid-Cap and S&P BSE Smal­lCap in­dices lost 15% and 25% re­spec­tively. The end of the event­ful year points to the worst be­ing over. The out­look for 2019 seems bright and con­sid­er­ing that the worst is over, the ex­perts ex­pect a turn­around in for­tunes now. Stock prices seem to have bot­tomed out. Since most of the do­mes­tic and global stress has al­ready been fac­tored in, there is not much worry left. The In­dian eq­uity mar­kets wit­nessed low earn­ings growth in 2018. The earn­ings growth in Q3FY19 will also not be good be­cause of in­ven­tory losses caused by the fall in com­mod­ity prices. How­ever, things are likely to im­prove in 2019 led by large cor­po­rates banks. The sys­tem-wide NPA is­sues have peaked out. Once the NPA write-offs re­duce, these banks are likely to re­port nor­mal profitabil­ity. Fi­nance as a sec­tor has around 41% weigh­tage in the Sen­sex and just the earn­ings nor­mal­iza­tion of three large cor­po­rate banks i.e. ICICI Bank, Axis Bank and State Bank of In­dia can gen­er­ate suf­fi­cient push to grow earn­ings at over 20% in 2019-20. Lit­tle won­der, of late the bank­ing sec­tor in gen­eral and such banks in par­tic­u­lar are show­ing signs of a great re­vival.

The year 2018 had be­gun on an op­ti­mistic note with the mid-caps and small-caps quot­ing sig­nif­i­cantly higher than the large-caps. But these seg­ments also saw the deep­est cuts in the se­cond half of 2018. Mar­ket pun­dits are not yet fully pos­i­tive on these seg­ments. Al­though the valu­a­tion gap has come down, it is still not at re­al­is­tic lev­els. There­fore, it may be pru­dent to go with the large-caps or se­lect mid-caps and keep a safe dis­tance from the small-caps. His­tor­i­cally, mid­caps and small-caps have traded at a dis­count to large-caps. But they are still at a pre­mium even af­ter the re­cent cor­rec­tion. There­fore, till the pre­mium van­ishes, large-caps re­main a bet­ter bet. Sec­tor wise, IT was the best per­former of 2018. Though the sec­tor has some steam left, it may not be the best per­former now. On the con­trary, signs of fa­tigue are no­tice­able. The FMCG sec­tor may con­tinue to re­port de­cent growth in 2019 as well. A ru­ral push in the elec­tion year, sops to ru­ral pop­u­la­tion by farm loan waivers and other ben­e­fits will fuel ru­ral de­mand. Au­to­mo­biles af­ter a lull may de­velop a plateau of de­mand and mar­gins. In­ter­est rates for 2019 are likely to re­main at the cur­rent level with an up­ward bias. Do not ex­pect a rate cut any­time soon. If at all, it may hap­pen in the se­cond half of 2019. The in­ter­est rate for the Se­nior Cit­i­zen’s Sav­ings Scheme is still as high as 8.7%. The bonds is­sued in the first quar­ter of cal­en­dar year 2019 of­fer a neat 8.75-9.10% and sub­stan­tial money

shall flow in here. Pub­lic Prov­i­dent Fund (PPF) or Em­ployee Prov­i­dent Fund (EPF) re­mains a good op­tion. Also, yields in cor­po­rate bonds are still high. So debt funds fo­cused on this seg­ment are likely to earn good re­turns in 2019. Debt fund in­vestors now should re­strict short-to-medium term funds be­cause the volatil­ity here will be low and there­fore, the risk ad­justed re­turns will be high.

In 2019, the eq­uity mar­kets will re­volve around fuel prices and po­lit­i­cal fever. The elec­tion year gives tremen­dous op­por­tu­nity to pick up se­lect stocks at abysmally low lev­els amid the poll out­come fear. A hung par­lia­ment could melt stock prices and in­vestors must use the op­por­tu­nity to ac­cu­mu­late stocks at beaten down lev­els. In­se­cu­rity at the po­lit­i­cal level is not a per­ma­nent fea­ture and there­fore, buy­ing dur­ing such melt­downs will need guts and pa­tience of the high­est order. Re­turns of such in­vest­ments in ab­so­lute term will be very high.

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