FY19 likely to be a volatile year for Indian equities, believe experts

Mumbai, Mar 30: Indian equities were on a roll for the most of 2017-18 aided by strong domestic liquidity and favourable macroeconomic conditions. In fact, the ride till January this year was so smooth that the market did not witness a single correction in excess of 5 per cent. The rally, however, has been derailed since February, and experts believe 2018-19 will be a volatile year.
The sharp rise in global bond yields was a key factor that contributed to the recent volatility. Yields on India’s 10-year government securities also touched a four-year high in February on fears of high domestic inflation and aggressive rate hikes by the US Federal Reserve. Likewise, widening of the fiscal deficit targets raised concerns of a reversal in the policy stance by the Reserve Bank of India (RBI). This, coupled with the scam involving Punjab National Bank, weighed on banking shares that have significant weight in key stock indices. The reintroduction of the tax on long-term capital gains (LTCG) in the Budget and higher taxes on mutual fund investors also dampened sentiment.
Indian equities corrected 5 per cent in February and another 3.5 per cent in March, eating into the gains clocked during the first 10 months.
On the brighter side, earnings growth, which was a drag in the first two quarters due to demonetisation and goods and services tax (GST) rollout, was promising in quarter ending December 2017. Experts believe that an economic recovery is on its way and that should help corporate earnings grow in double digits in FY19. “The whole of last year we have been waiting for the earnings growth to pick up; that finally seems to be happening. But, exports growth still hasn’t picked up and interest rates are set to go north, factors that may impact sentiment,” said UR Bhat, managing director, Dalton Capital Advisors (India).
According to Deutsche Bank, India has been witnessing a strong divergence between fundamental sectoral trends and investor sentiment since mid-2014, which manifested in a breakaway between equity market performance and corporate earnings growth. The bank believes this trend is set to reverse. “While sentiment has soured on the back of both rising oil prices, an inflation led bond market sell-off and domestic factors such as the Nirav Modi fraud and fears of slowing loan growth… ground indicators across industry have shown a sharp improvement,” said Abhay Laijawala, head of India research at Deutsche Bank.