The year 2018 proved interesting. Equity markets ended a volatile 2018, up 5.9 per cent from the start of the year. Crude oil prices, global trade-war tensions, rupee volatility, liquidity concerns and policy action by central banks kept markets on tenterhooks.
The year 2019 too is likely to prove interesting for investors, with markets bracing for near-term volatility from the outcome of a major event – the general elections. We believe that the Indian equity market is neither cheap nor expensive, ie. it looks fairly valued.
Unlike in the previous year, when large-caps were better placed than mid-caps and small-caps, this year we believe the focus will be on individual stock picking, given the several pockets available at attractive valuations.
Several encouraging factors keep the markets upbeat. To begin with, the fall in crude oil prices has been a sentiment booster, as it greatly reduces pressure on current and fiscal deficits. Consequently, the rupee too turned around to 70 levels from 74 levels against the US dollar. Bond yields too are coming off, lowering the interest burden on the economy. Above all, macro-economic figures are once again showing signs of financial stability.
From a near -term to medium-term perspective, equity markets are likely to be volatile. This is because election years have proven to be volatile for markets in general. In the past, across all election years – 2004, 2009, 2014 – markets have provided investors with intermittent opportunities to invest. Policy decisions by the RBI, end of the bond-buying programme by central banks globally, escalation of trade wars, pace of foreign investment inflows among others, would be other significant triggers. In such times, the best investment strategy is to go the systematic investment route to accumulate equities.
We believe 2019 is the year to systematically accumulate equities through SIPs and STPs, keeping emotional biases at bay. Such an accumulation phase is generally a precursor to a bull run. Thus, it is important to be patient and remain invested through this phase to make outsized gains in the eventuality of a market upswing.
The most recent example of this has been from 2010 to 2013. During this period, stock markets were largely range-bound. But, for those investors who stayed invested, the rewards came in the years 2014-17 when the markets entered a bull phase.
Amidst all these, there are a few factors that investors need to watch out for, beginning with the US Fed’s stance on interest rates. We believe a marked rally in Indian equities is likely only when the US Fed tightening is done with. Along with this, the accumulation phase too is likely to come to an end.
Where to Invest
* Equity: With this stance in mind, we believe the current investing climate is conducive to investors initiating or continuing with their systematic investing in equity assets such as small-caps, mid-caps, multi-caps and value funds. For those looking to make lump-sum investments, balanced advantage funds and equity savings funds should be the preferred vehicles.
Such categories of funds are exposed to both equity and debt and hence provide a margin of safety if things get choppier. In terms of themes, we are positive on special situations and those benefiting from volatility. Areas such as banking and infrastructure could be explored in 2019, after the recent oil price fall.
* Debt: In debt, dynamic duration schemes which can benefit from volatility, low-duration funds which tend to mitigate interest-rate volatility (investing in instruments with maturities of one to three years) along with accrual schemes, which can capture the current elevated yields, are the schemes we are positive on.
An open ended fund of funds scheme investing in equity oriented schemes, debt oriented schemes and gold ETFs/ schemes.