Domestic Institutional Investors (DIIs) who have fuelled the resilience of the Indian stock market this year, pumping in around Rs 1,11,000 crore into Indian equities, have now turned net sellers
Satish Menon
Geojit Financial Services
It is said that markets like good news, dislike bad news and hate uncertainty that creates volatility.
2018 is drawing to a close, but so far market volatility has shown no signs of winding down. The list of reasons that caused uncertainties seem to be long, but fundamentals of the market are strong and favourable in the long term.
Indian equity market — Asia’s top performer — began the year on a strong note and continued to be an outperformer in spite of an erratic world equity market. Amid a flurry of bad news, the broader Indian market has witnessed excessive volatility, setting the market on a roller coaster ride. From surging oil prices, a slumping rupee, rout in non-bank lenders to global sell-offs, US-China trade war and the Assembly Elections have all kept the uncertainty alive for market participants. These are ‘normal’ cyclical economic events, which have occurred in the past and will occur in the future, which the market digests over a period of time.
Let us look into the hurdles the Indian stock rally will face and factors that will drive the market in the near to medium term.
Since December 2017, the benchmark indices hit multiple records, but the market is polarised and the gains have been uneven. This rally in the Sensex and Nifty has been confusing for investors, as it is only led by a handful of stocks. The broader markets took a battering as midcap (Nifty Midcap100) and Smallcap (Nifty Smallcap100) indices dropped, with cuts of 15.5 percent and 30 percent, respectively, for the year till date. As a result, many investors’ portfolios are largely in the red even as the markets are in green.
And 2019 is not likely to be an ordinary year. For a certain period, the outcome of the all-too-crucial general elections may weigh on the market. This will make the stock market’s short-term outlook harder to predict. But, the data over the past three decades clearly suggests that elections are mere “interruptions” and they don’t disrupt the nation’s economic structure or business cycle.
Hence, for the medium to long term, markets track fundamentals and earnings growth as the key positives. This means, markets can deliver strong returns across political regimes. The strong growth rate and stable economic policies are key positives for the stock market in 2019.
Globally, the ongoing trade war between the US and China, could have a domino effect on most emerging markets, leading to a slump in overall growth. And India would not be able to completely shrug off its effects.
Oil prices and tumbling rupee will also be the true driver of uncertainty over the coming year. Although there has been a significant drop in oil prices, and now the market is fretting about over-supply, it could be a macro risk for India, in case it rises back to earlier levels.
India being a developing economy with high inflation, depreciation of the currency is quite natural. Although a depreciating rupee would benefit exporters, but from a macro perspective, a weak currency doesn’t bode well for a net importer like India.
But after plunging to a life-time low of 74.48 against the US dollar, the rupee is gradually recovering. This is because the ongoing weak fundamentals are expected to be short-lived and support the currency further, as the long-term economic trajectory of India is reinforced and the US the Fed rate hike is normalised.
Another factor that will impact the market is Foreign Institutional Investors (FIIs). They had been on a withdrawing spree, pulling out around Rs 58,000 crore (including equity & debt), in September and October attracted by better returns in the US, but have since made a strong comeback into the Indian markets (witnessing an inflow of Rs 19,400 crore in November & December). Selling can be attributed to rising bond yields in the US and weakening emerging market currencies.
However, Domestic Institutional Investors (DIIs) who have fuelled the resilience of the Indian stock market this year, pumping in around Rs 1,11,000 crore into Indian equities, have now turned net sellers.
It has been an action-packed year for the Rs 24 lakh crore Indian mutual funds (MF) industry as some important changes were implemented.
Fund categories got standardised making it easier to compare fund’s performance.
Fund flows were strong despite equity markets remaining volatile throughout the year. SIP’s continue to be the ideal investment vehicle as it takes out timing from the investment process and averages the cost of investment during the time of sharp market corrections as seen during the year.
To conclude, the headwinds from political uncertainty and tailwinds from crude and improving micros provide opportunities for investors, who must continue to ride the volatility and stick to their financial plans.
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