Equity outlook: Markets not appear less risky than earlier

Published: April 12, 2019 1:01:05 AM

Investors should put in more money given that valuations appear more reasonable. They can expect good returns from equities over a long period.

Illustration: Shyam Kumar Prasad

By Quantum Mutual Fund 

March turned out to be a very rewarding month for equities. The US Fed’s stance of raising interest rates came to a halt. This was followed by a rally in most asset classes. S&P BSE Sensex rose 7.9% during the month. Small and mid-cap indices performed even better with appreciation of 9.8% and 8.2% respectively in indices. In the three months of 2019 S&P BSE Sensex rose 7.4%.

S&P BSE midcap and smallcap index gained 0.4% and 2.3% respectively, owing to losses in earlier months of 2019. Auto, metal and capital goods were sectors that ended in negative territory during March. Liquidity problem and excess dealer inventory have caused slowdown for auto sector. Real estate, consumer durables and oil & gas stocks had double-digit returns for the month. For the real estate sector, there was the launch and listing of the first REIT in India.

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FIIs buy, DIIs sell

Foreign institutional investors (FIIs) rushed in to buy Indian equities in March. FIIs were buyers to the tune of $6.1 billion during the month. Their tally for the three months of 2019 stands at $8.4 billion. Domestic institutions were net sellers for the month. They sold $2 billion worth of stocks. Mutual funds sold $1.1 billion, while balance came from insurance companies.

Year to date, domestic institutional investors (DIIs) have redeemed $1.8 billion worth of equities. Indian rupee appreciated 2.2% during the month against US dollar. Global macro-economic environment has gone through major changes in the last few months.

Global factors

The US Fed has raised interest rates four times during 2018 and now there is unlikely to be a rate hike in the near future, given the fears of recession. The European Union has seen a decline in economic activity as measured by decline in PMI. In this scenario, investors have adopted a risk-on strategy and are pouring money in emerging markets including India. This scenario can change quickly.

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The US continues to be strong with unemployment close to historic lows. Inflation is also running at 2%, near target level. Any progress on a tariff deal with China would lead to growth concerns disappearing. And the path of lower interest rates can reverse. In such a scenario, emerging market equities could come under pressure, at least temporarily. Western investors, if they get better returns in the home market, will withdraw from risky assets such as emerging market equity.

Elections at home

The Lok Sabha elections will be held in seven phases between April 11 and May 19 and results will be announced on May 23. April onwards, Indian listed companies will announce fourth quarter and full year results. Corporate capex is likely to remain muted as companies are waiting for the new government and its policies before committing capital.

There has been a good correction in stock prices in the past few months since September 2018. Many stocks which looked highly valued earlier now seem to have come within reach. Upcoming elections could be weighing on the minds of markets and investors.

History, however, suggests that the Indian economy has grown well irrespective of single party or coalition governments. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Investors can expect good return from equities over a long period in future. Investors should put in more money given that valuations appear more reasonable. Markets now appear less risky than earlier.

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