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
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-
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
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.