2019: Great year to pick stocks
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.