Stock markets: Seven trends to watch out for in 2019

Published: December 28, 2018 12:53:56 AM

Inflation, global oil prices, GDP growth and trade deficit will be some of the key parameters to watch out for next year.

Illustration: Shyam Kumar Prasad

By Mayuresh Joshi

The year 2018 has been volatile, to say the least. On the positive side, GDP showed green shoots of recovery while inflation continued to stay low. The rupee and the bond yields recovered to normal levels after a negative rally post-August. Here are key highlights of 2018 and implications.

The introduction of LTCG on equities and the synchronized introduction of additional surveillance measures (ASM) on mid and small-cap stocks resulted in a sharp correction in mid-cap stocks. The index may have been flat but that did not give the real picture. Foreign portfolio investors (FPIs) sold close to Rs 1 trillion in equities and bonds during 2018.

Trade war, volatile oil prices
The most talked about news was the trade war that is threatening to spiral out of control. With heavy tariffs on China, the US invited retaliation. It also resulted in grave concerns expressed by IMF that global growth could falter by 30-40 bps. India is also likely to be impacted. Albeit, the 90-day cool off period between the US and China and any resolution which comes through has created a sentimental hope in global markets on this issue.

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Oil was volatile during the year. Brent crude touched a high of $86/bbl in October 2018, but retreated back to $58/bbl by December. The US had to dilute Iran sanctions to avoid the embarrassment of China and India refusing the toe the line. It created tremendous volatility in the INR and other EM currencies.

There was big action in global politics. Donald Trump lost majority to the Democrats in the Senate even as UK continues to stand on the threshold of a tumultuous BREXIT. Back home, India saw the NDA juggernaut thwarted by successive defeats in Karnataka, Madhya Pradesh, Rajasthan and Chhattisgarh.

One event that has left analysts, economists and investors worried is the inversion of the US Yield Curve. In the past, inversion of US yield curve has typically signalled a recession within the next two years.

Big stories to watch out for in the year 2019
In a way, the year 2018 has set the tone for the coming year. Investors in India will be closely watching 7 key parameters to take an investment view.

  • Despite a supply cut announced by OPEC and Russia, US shale is likely to remain oversupplied. At what levels shall oil gyrate in the coming year is an important aspect to be watched out for.
  • Political numbers are hard to predict, but markets will be worried about the impact of any coalition government on the sustenance of the reforms process.
  • Inflation, growth and trade deficit will be the three key parameters to watch out for. Inflation has stayed under 4%. If that continues, RBI can consider rate cuts. But more important will be that GDP growth builds on its 100 bps advantage over China and trade deficit does not cross current levels.
  • Watch for the inversion of the US yield curve. If it is more of a liquidity mismatch, the markets will not be bothered. Any signs of growth weakness will result in a shift to risk-off assets by foreign investors.
  • Year 2019 will really test the resolve of the Euro. Italy is threatening to secede and others like Spain and Portugal could follow. That could make
    the Euro unsustainable. There is also likely to be pressure from the BREXIT, despite UK not being part of the common currency.
  • Trade war will be closely watched. While a three-month ceasefire has been declared, the trade war is far from over. India will be worried about a currency war as Chinese devaluation will result in rupee being forced to weaken. That may not be great news.
  • The situation in the Middle East is already tense and year 2019 could see the unravelling of the OPEC. Already Russia is calling the shots and that is not great news for Saudi oil leadership. How it impacts its influence in the GCC remains to be seen.

Year 2019 promises to be interesting and tumultuous. The one good news could be that the India consumption story may be largely unperturbed.

(The writer is fund manager, Angel Broking Ltd)

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