The first month of 2019 was positive for Indian equities as the S&P BSE Sensex rose 0.5% during January. However, S&P BSE Midcap and S&P BSE Smallcap index had declined by 5.7% and 5.3%, respectively in January. Sector such as IT, consumer durable and banking performed well during the month. Auto, capital goods and metal stocks were laggards.
Foreign institutional investors (FIIs) in the month of January were inactive with sell orders of $75 million. Domestic institutions were net buyers during the month to the tune of $300 million approximately. Mutual funds were buyers of $1.2 billion while insurance companies sold stocks worth $880 million. The rupee depreciated 1.9% during the month.
The US Fed in its meeting during the month indicated that it will be patient with raising interest rates. It will also go soft on normalisation of its balance sheet, meaning it will be less aggressive in reducing the balance sheet size. This news was cheered by the equity markets. Fears related to recession and trade sanctions led the U.S. Fed to change its stance.
Over the long term, interest rates will rise in developed markets. This will be detrimental to stock prices in emerging markets including India. Investors getting higher return in home markets will likely reduce exposure to riskier emerging markets as interest rates move up overseas.
Budget eye on polls
A major event at the start of February was presentation of the interim union budget. The budget presented had an eye on elections. A number of schemes were launched for the agriculture sector of which guaranteed money transfer to farmers was highlighted. Salaried tax payers also stand to benefit with increase in exemption for paying income tax.
The government borrowing and fiscal deficit is likely to increase due to welfare schemes and forego tax revenue. Sectors such as housing also stand to benefit from budget proposals. However, since this is an interim budget, its measures can be reversed if the new Government takes charge.
In fact, January saw a number of listed companies announcing their third quarter results. There was heightened volatility in a media stock after rumours of involvement in money laundering of a group related company. This was further accentuated by selling of its pledged shares by financiers. Another housing finance company was targeted by a media house of loans being routed to founders. Many stocks with links to these entities were hit.
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 come within reach. Scheme cash level now is in low single digits, offering decent potential return. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many countries. Investors can thus expect decent return from equities over a long period in future. Investors should put more money given that valuations appear more reasonable. They now appear less risky than earlier.
The writer is head, Equity, Quantum Mutual Fund