How Indian markets performed in 2018 vis-à-vis world markets:
Before we get into 2019, let’s look back and see how the Indian markets performed in 2018 vis a vis the world markets. Indian indexes showed lots of volatility in the year but ended the year at a slightly positive and flattish note at 4% gains (NIFTY in INR terms) . While NIFTY rose by about 4%(from 10435 to 10857), Sensex rose by 6% with respect to 2017 closing levels (from 34056 levels to 34068), . US markets performed at a flattish way with MSCI index going up by 1.8% ,mainly impacted by Trump’s volatility , US China trade war woes , Fed rate hike related outlook and muted global economy growth outlook. While the world MSCI index grew flattish by 1.8%, Emerging Markets index grew by 1.3%, Europe by 1.7%, Japan by 2.4% and China by 0.6%(all in US Dollar). The only major economies beating India in the Index growth was Brazil(8.8%) and Argentina(7.2%).
So , the conclusion is that while India indexes didn’t perform well and was flattish , same was true for other major economies of the world too.. While the main market Indian index ( large cap companies), showed flattish but positive movement , the broader market(mid caps and small caps) didn’t do well . While mid cap Indian indexes slided by 15% , small cap index slided by 29% .This was mainly due Crude oil spike , Rupee depreciation , FIIs pulling their money out , domestic liquidity squeeze due to NBFC crisis , state elections results going against the ruling party and muted expectations of corporate earnings recovery.
My forecast of the Indian markets in long term and 2019:
I am a long term investor who focuses on long term trends and projections of my favourite businesses/stocks and the economy/ market . I would not dare to venture into the short term precise Sensex forecast as markets are very unpredictable in short term. This year , Global markets might be volatile especially in the first half of the year due to factors like Fed increasing the interest rates, US -China trade war woes, Trump arbitrary actions/initiatives , Global economy slow down(US economy slowing down from 2.9% now to 2.5% in 2019 and Chinese economy slowing down to 6.3% from 6.6%) etc. These global factors will definitely have an impact on Indian markets. Domestic factors like General elections in May 2019 , 2019 Budget proposals focussed on spending , Fiscal deficit of FY19 exceeding the target of 3.3%, restart of private investment cycle and corporate earnings pickup in the second half of the year will have an impact on the market levels. Government spending in an election year on farming /rural sector, encouraging infrastructure (roads, railways, ports before election) and consumption spending will also play a significant role in improving the economy as well as corporate earnings . My hunch is that 2019 would see lots of volatility and subdued market performance in first half of the year before the election . But post the election , after a stable single party or a coalition government is in place , the market will rise in tandem with the new government policy announcements and corporate earnings growth as the PE multiples now are already at a fair value with the historical averages(17 times forward earnings -FY20 Earnings – when compared to historical forward earnings multiple of 16 times). Earnings growth expectations are in mid teens(15-16%) and hence the market which is at fair value , might grow in the range of 10% to 20% which would mean sensex should be in the range of 40,000 to 43000 by the end of the year from the current 36000 levels..
After clocking flattish returns equity in 2018 , equity investors will enter the new year with lots of worries on domestic political uncertainty / elections , macro challenges , concerns on earnings growth in their minds. They will keep a close watch on global cues as well as domestic factors like pollical news / elections , potential rise in crude oil prices, inflation trends , burgeoning fiscal deficit concerns etc. Any rise in fiscal deficit, inflation and crude prices might prompt RBI to re-start hiking the rates again. While these challenges will be in the minds of investors , there are couple of green shoots too which the investors should keep in mind. The latest GDP forecast for FY19 is at 7.2% which is at 3 year high, better than 6.7% for FY18. The growth in manufacturing and construction is at >8% for FY19 while growth in services sector is at 7.3%. Gross Fixed Capital Formation has improved to 12.2% from 7.6% last fiscal . This translates into a healthy 30% Investment to GDP ratio FPI inflows was at its worst in 2018 with an outflow of about $15 Billion when compared to inflow of $30 Billion in 2017 . FPI inflows started happening in December 2018 after crude oil fall and rupee appreciation . Increasing and steady FDI and FPI inflows as well as steady inflows from domestic investors into equity funds are the other factors which might support and stabilize the market growth in the coming year. Improving Macro economic factors( reduced crude oil prices, stable Rupee, reduced inflation/Current account deficit)and reasonable market valuations(especially mid caps and small caps) after some correction in broad markets also augurs well for the India equity market.
I would like to repeat that India economy and the market have already started a strong and long term structural bull market in 2014(I had predicted the same in my multiple blogs in 2012 and 2013). There could be small and temporary corrections or fall in the market(like we had in last quarter In 2016 when Sensex fell from 29000 levels to 26000 level and Q3 of 2018 when Sensex fell from 39000 to 35000) but the long term trends should be a very positive one for next 15 to 20 years As far as my long term Sensex prediction is concerned, I am predicting Indian market(Sensex) doubling up every 4 years for next 16 years which means Sensex multiplying 16 times in 16 years (reaching about 5,75,000 by end of 2035). This means that you can multiply your wealth 16 times in next 16 years just by investing in Sensex EFT or index funds. If you do a bit of quality stock picking, you can beat this rate and multiply your wealth by 20-30 times by 2035 . This kind of long term wealth creation opportunities can happen only in rare asset classes (like Indian blue chip equities) in the world. The economic and investment cycles have bottomed out and will show a sustained long term positive trend from now. The macro variables have come under control with CPI inflation at <4% , Fiscal deficits under control at about 3.5%, stable government , stable foreign exchange reserves etc .
My 2019 Model Stock portfolio
In summary , the macroeconomic , domestic and global factors are uncertain and cloudy which could be creating further volatility . Hence 2019 is going to be a stock picker market not a general market condition where you can bet on Index and certain sectors .Hence the need to have a disciplined bottoms-up approach to research and pick the right business –quality businesses run by quality management with strong balance sheets, earning decent return of capital/ equity(ROE) and good long term growth outlook/track record, available at attractive prices/valuation( providing decent margin of safety). As per my tradition in last few years, I am publishing my top 15-18 stock picks for 2018(model portfolio 2018) in which I am investing now .
My 2019 Portfolio of Top 18 business/ stock picks(stock related data as per 1st Jan 2018) :-
What are the sectors which could yield some great bottoms-up opportunities? Some of the sectors I like are discretionary consumption sectors like Consumer durables and Automobiles ( Titan , VIP Industries, Maruti & Ashok Leyland) because of consumption and rural sectors picking up buoyed by Government spending actions and announcements in an election year, consumer based Strong & Niche NBFCs -Non Banking Finance Companies (Bajaj Finance, Bharat Financial Inclusion & Chola mandalam investments) as they are good value plays after a temporary bad news/ crisis in NBFC sector, private banks with good NPA and growth track records(Yes Bank & IndusInd bank), Infrastructure and capital good sectors(Power Grid, Graphite India and Larsen )since the government has launched big ticket infra projects like Bharat-mala and sagar-mala projects. Apart from these sectors , there are some defensive sectors like IT and pharma(HCL Technology, Tech Mahindra, Natco & Aurobindo pharma)which had corrected well due to some temporary headwinds and are now picking up now due to Rupee devaluation .These are the 16 stocks I have picked up carefully for focussed and long term investing in 2019. Out of these 16 stocks, 12 stocks have been repeated from my last few years model portfolios while 4 are new ones. The selection bias is deliberately oriented towards large caps except 3 midcap stocks/ businesses(Graphite India , Natco Pharma and VIP Industries) to reduce the risks in a volatile and uncertain election year.
All these businesses are quality businesses with durable competitive advantage with excellent returns on capital/equity(Consistently high ROE), strong balance sheet( reasonable Debt/equity, Debt/Profit ratios ), competent managements and stable growth records/outlook( Consistent Sales and Profit growth rates) and yet available at under-valued/fair prices ( reasonable PEG ratio and PE ROE ratios) , providing a great “margin of safety” for value and long term investors. This market is in a long term structural bull rally and therefore any fall or correction would be temporary and should be treated as a good opportunity to invest in these quality stocks or businesses for long term with a long term returns of 20-25% per year (on an average).
Wish you a very happy New Year again and Happy investing,