Mar­kets stare at a volatile 2019, po­lit­i­cal un­cer­tainty key worry

Global slow­down, trade ten­sions be­tween China and US, volatile oil prices may also keep mar­kets on the edge in the new year

Mint Asia ST - - News - BNY ASRIN S ULTANA

De­spite un­cer­tainty through the year re­lated to a host of fac­tors, in­clud­ing val­u­a­tions, earn­ings, in­ter­est rates and elec­tions, In­dian mar­kets have out­per­formed their global peers in 2018. A syn­chro­nized global eco­nomic slow­down, China’s struc­tural de­cel­er­a­tion and po­ten­tial es­ca­la­tion in the Us-china trade con­flict threat­ened Asian eq­ui­ties in the year gone by.

An­a­lysts ex­pect po­lit­i­cal un­cer­tainty to be a neg­a­tive over­hang in the first half of 2019 but said lower oil prices have cre­ated a pos­i­tive en­vi­ron­ment that could help to cor­rect macro im­bal­ances (twin deficits), ease un­der­ly­ing in­fla­tion­ary pres­sures and open up some space for pol­icy eas­ing.

Volatil­ity is ex­pected to rise in eq­uity mar­kets in 2019 with po­ten­tial risks seen from a global slow­down and China-us trade is­sues, oil prices and gen­eral elec­tions in In­dia.

There could be volatil­ity in the eq­uity mar­kets un­til the out­come of the elec­tions be­comes clear, while near-term leg­isla­tive and pol­icy ac­tions may be in­flu­enced by elec­tion pop­ulism, ac­cord­ing to Neelot­pal Sa­hai, head, eq­ui­ties, HSBC Global As­set Man­age­ment In­dia. ”The year 2019 could be a year of two halves, with the first half char­ac­ter­ized by volatil­ity on the back of the gen­eral elec­tion cy­cle and in the sec­ond half we should see fun­da­men­tal fac­tors tak­ing over and in­flu­enc­ing the eq­uity mar­ket per­for­mance,” he said.

Sen­sex and Nifty gained 5.91% and 3.15% re­spec­tively in 2018 af­ter a block­buster year for eq­ui­ties last year. How­ever, both BSE mid­cap and BSE small-cap in­dices slipped to sev-

AS­SET-CLASS PER­FOR­MANCE

en-year lows on con­cerns of steep val­u­a­tions and reg­u­la­tory mea­sures. Among ma­jor mar­kets, the Shang­hai Stock Ex­change Com­pos­ite In­dex (down 24.59%) saw the steep­est de­cline in 2018. The MSCI Emerg­ing Mar­kets and MSCI World in­dices slipped 16.90% and 11.06% in the year gone by.

Amid stock mar­ket volatil­ity, for­eign in­sti­tu­tional in­vestors (FIIS) fled In­dia and eq­uity mar­kets saw a net out­flow of $4.38 bil­lion, the steep­est sell-off in a decade. How­ever, do­mes­tic in­sti­tu­tional in­vestors (DIIS) in­vested a record ₹ 1.09 tril­lion in In­dian eq­ui­ties in 2018. Crude prices rose 12.86% from Jan­uary till Oc­to­ber but fell 18.47% in the year.

Ac­cord­ing to No­mura, a sharp cor­rec­tion in oil prices is a pos­i­tive terms-of-trade shock that is likely to cor­rect macro im­bal­ances, boost real dis­pos­able in­comes, and im­prove profit mar­gins, al­beit with a lag. No­mura said the 2019 elec­tions should mark a turn­ing point as po­lit­i­cal sta­bil­ity and the lagged ef­fects of lower com­mod­ity prices should en­able a re­cov­ery in the sec­ond half, push­ing gross do­mes­tic prod­uct (GDP) growth back to­wards 7% by the end of 2019 from 6.2% in

CAP­I­TAL FLOW

the first half of 2019. “We ex­pect fund­ing to re­main a chal­lenge un­til the elec­tions be­cause of both the ad­verse do­mes­tic en­vi­ron­ment (weak growth and po­lit­i­cal un­cer­tainty) and global fac­tors. How­ever, we ex­pect net cap­i­tal in­flows to ac­cel­er­ate in the sec­ond half of 2019 and am­ply fund the cur­rent ac­count deficit, as both do­mes­tic and the global risk en­vi­ron­ment turn more favourable,” No­mura said in a note on 10 De­cem­ber.

S. Naren, ex­ec­u­tive di­rec­tor and chief in­vest­ment of­fi­cer, ICICI Pru­den­tial AMC, be­lieves 2019 is likely to pro­vide a bet­ter in­vest­ment op­por­tu­nity in eq­ui­ties as com­pared to 2018 be­cause the mar­ket is fairly val­ued now.

“Un­cer­tainty re­gard­ing gen­eral elec­tion and global de­vel­op­ments such as the pace of US Fed quan­ti­ta­tive tight­en­ing are some of the chal­lenges the In­dian eq­uity mar­kets could likely face,” Naren said. On the global front, emerg­ing mar­kets could come to the spot­light this year with ex­pec­ta­tions of a slow­down in de­vel­oped economies, while In­dia is like to move into a sweet spot to­ward the lat­ter half of the year.

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