Liquidity Ballast to Indian Equity Markets

This article was published in The Economic Times on 23rd Jan, 2019

Markets do just fine under a coalition govt; other risks investors must watch in 2019

This was published on 2nd of Jan 2019 in Moneycontrol.com

First things first, India’s macros are on the upswing. The biggest risk to our 8-6-4 benchmark framework for the macro (8 percent GDP growth, 6 percent combined fiscal deficit and 4 percent inflation), for the moment, seems to be a gross under-shooting of CPI inflation.

More seriously, though, tactically and structurally, India’s domestic macros are more robust than they have been in a long time -- with the sharp correction in oil prices taking care of the biggest dark cloud, i.e., current Account Deficit (CAD), which we think has peaked at 2.9 percent of GDP in the last quarter.

The macros have been on the mend for some time. It has been the micros, especially corporate earnings that have been sluggish.

A marked turnaround is under way. While less than originally expected, earnings are expected to show double the growth rate that we have seen in the last 6-7 years.

Add to that, a significant price correction is seen in a range of stocks in 2018. It looks like 2019 should be the year when India’s micro picture should be brighter than in the recent past.

Most of the conversation though would be around the general elections. A lot of projections and investment theses are being predicated on the outcome of that.

While the role and impact of the central government cannot be downplayed, the concerns typically associated with coalitions are not borne out by data.

As can be seen in the table above, coalitions, especially seemingly unstable coalitions (PV Narasimha Rao’s, or UPA1) have delivered fairly robust levels of stock market performance.

Even in terms of policy initiatives, some of the biggest interventions, e.g., the last radical restructuring of direct tax rates, was done during the United Front government of HD Deve Gowda.

Ergo, while a decisive mandate would be taken positively, it isn’t quite a “done deal” that a coalition would be negative from a policy perspective, or indeed even from the waypoint of how the markets view the results.

The nuts and bolts -- high-frequency indicators -- too point towards a cyclical upturn. IIP growth (November, at 8.1 percent, was on the back of a high base), bank credit growth (running at 15 percent, again a multi-year high), volume growth for the private corporate sector (reflected in Nifty topline growth rates) -- the data is coming out to be better than what the general narrative seems to suggest.

The biggest potential headwind for markets in 2019 would be global. A whole bunch of issues -- US-China trade war, a potential recession in the US, the direction of oil prices -- are intangibles that would be the biggest challenges for India.

Especially as India is far more globally integrated than is popularly believed, with trade accounting for 35-40 percent of GDP (higher than even China). This is the space that would be most closely scrutinised for cues by investors.

The problem, to paraphrase Cassius, is not in our stars, but in someone else’s!