Calendar 2018 had started on an optimistic note, as equities had generated relatively better returns in 2017. The Nifty 50 index had risen by 28 per cent in 2017, while the Nifty Mid-cap 100 had returned 47 per cent and the Nifty Small Cap 250 index posted 57 per cent. The mid-cap valuations as indicated by NSE midcap trailing PB relative to Nifty were at a decade high. Most of the market looked fully valued and most of the small caps and midcaps looked overvalued. In CY2018, the Nifty 50 returned merely 3 per cent. The mid-cap universe ended with a 15 per cent decline and the Small-cap Index declined by 27 per cent. Hence, the lesson to learn from 2018 is that valuations matter. If you started to invest when valuations were at peak, it is likely that you will end up losing money as markets correct.
Where do we stand today? When we compare the start of 2019 with that of previous year, it appears that there is a higher margin of safety today. The easing of crude oil prices, persistent weakness in inflationary trends and the easing of bond yields have resulted in a marked improvement in macroeconomic conditions. Earnings growth is set to revive meaningfully in FY19-20, primarily driven by peaking out of NPA-related provisioning requirements for banks. If we compare the market cap to GDP at 81 per cent (December 31, 2018) with 149 per cent as seen on December 31, 2007, it clearly indicates we are not anywhere near the bubble territory but in fair value zone. Currently, we find that around 80 per cent of the stocks are fairly valued and a small set of stocks could be considered overvalued. In 2018, there was a big divergence not only in the returns profile of mid and large caps, but also among the sectors indices. There were sectors such as IT and FMCG which generated double-digit returns, while sectors such as realty, media, metals, auto and telecom lost ground in double digits. The story continues for the banking space with the private sector appreciating, while the public sector banks continuing to weigh under the NPA pressure. NBFCs, which had a stellar run, saw a brief reversal in its fortunes owing to the large potential defaults. Keeping in view this 2018 experience, we believe year 2019 is likely to be about stock picking, which can help generate healthy returns for investors.
India as an investment destination continues to hold sway given the burgeoning domestic demand, lower interest rates, fall in crude oil prices, all of which helps in improving the economic activity in the country. Furthermore, corporate earnings, which have been languishing over the past few years, may see a revival this year supported by revival in credit demand, various investment initiatives started by the government, reforms playing out in various sectors, etc. However, one cannot rule out volatile times through 2019 owing to general elections, trade wars and a possible rise in crude oil prices. Hence, we believe from a retail investor’s point of view, it becomes easy to look at 2019 as a year for systematic investing.