Trade war- A blessing in disguise for long term investors!

Trade war- A blessing in disguise for long term investors! With multiple factors inducing volatility in equity markets, it is important that investors play the markets cautiously in 2018. Yogesh Supekar and DSIJ research team assess the outlook for the markets in CY18.

The year 2018 saw markets touching all-time high levels and market conditions at the beginning of the year indicated as if we were set for another year of the bulls. However, the way things are panning out, the enhanced volatility in the markets is giving enough hints to the investors that 2018 is not going to be a déjà vu year like 2017. Indeed, the year 2017 was one of the best years for equities in terms of risk-adjusted returns. The average draw down of Sensex for any given year in the past 22 years has been 15.74 per cent. In other words, if we calculate how much Sensex has come down from its opening levels at the start of the year, we find that on an average Sensex has come down by 15.75 per cent if we consider the data for the past 22 years. However, in the year 2017, Sensex came down by a mere 0.99 per cent, thus indicating the solid uptrend in the markets. If we go by the law of averages and consider that the year 2018 will show up an average performance, Sensex may go down during the year by 15.75 per cent from its opening levels. Sensex opened near the 34,000 level in 2018. A 15.75 per cent draw down from those levels would mean that Sensex can come down by 5300 points in 2018 from its opening levels, which suggests that Sensex can touch 28,700 levels anytime during the year.

Sensex made its recent lows at around 32,383 levels and recorded its all-time high of 36,442 in January 2018. Sensex is already down by 7.73 per cent per cent from its all-time high and is down by 1.2 per cent on a YTD basis.

While the consensus is that the market will remain volatile, the million dollar question remains how much can markets correct and how far can it go on the upside?

 There were 2,545 stocks that delivered average negative returns of 13.39 per cent. Only eight stocks delivered positive returns in excess of 100 per cent. There were at least 364 companies that generated returns in the range of 25 to 100 per cent on a YTD basis, while there were 126 companies that generated returns in the range of 0 to 25 per cent.

 
Pankaj Karde, Head- Institutional Sales & Sales Trading, Systematix Shares & Stocks (I) Ltd. 

What is your Sensex target for December 2018? 

We expect Sensex to see 30500-31000 levels at the end of December 2018.

Do you see IT stocks outperforming in 2018 ? 

IT stocks would be outperforming the broader indices. We believe Infosys and TCS are poised to outperform. We believe stock-specific outperformance to come in 2018.

What are key risks that investors should keep in mind while investing in CY18? 

Rising crude oil prices needs to be closely watched. Rising crude oil prices may lead to increase in WPI. Elections in key states such as Karnataka, Mizoram, Chhattisgarh, MP and Rajasthan along with Lok Sabha elections in early 2019, would keep driving market directions. Rising interest rates in India is one important risk to look out for. Banking sector issues still continue to haunt the markets. NPA issues in PSU banks need to be tracked closely.

Which sectors are clear avoid in your view in CY18? I believe when the markets are in correction mode, the best thing to do is to buy India story. Global sectors such as metals, oil and gas should be avoided. Also, pharma stocks with significant international business should be a clear 'avoid'. PSU banks have become very attractive on valuation basis and hence do not fall in this category.

Rajat Jain, CIO, Principal PNB Asset Management Company 

How will the markets behave in 2018? 

The Indian economy has been seeing a weakening macroeconomic envirownment as a result of higher current account deficit, likely stress on the fiscal deficit number for FY 19, and rising, though still moderate, inflation. Rising crude prices, continuing problems with NPAs of banks, especially the public sector banks, and a busy election season are the other challenges at the macro level. However, at the ground level, we are seeing strong consumption demand, especially in the rural areas. There is a broadening capex cycle outside of the infrastructure sector and a bottoming out of corporate earnings which are positives. In this situation, the market movement will be a factor of fund flows. We expect global fund flows into EMs to be choppy and while domestic investors have continued to invest in equity, further volatility could have an impact on these flows. In terms of valuations, the markets are trading at a slight premium to historical numbers. Overall, we expect the markets to move sideways during the year with substantial volatility in between.

Where do you see outperformance coming from for FY19? 

We are positive on domestic cyclicals like autos, auto ancillaries, cement and select stocks geared to capital spending. While we were underweight in IT stocks in our portfolio, we have reduced our underweight position in the past couple of quarters. Further, we have seen some mid-cap stocks correcting substantially, and while they may not be in the value zone, we think they are at a level where they can give reasonable returns over the next 2-3 years.

What is your take on the banking NPA problem? Have banks bottomed out? 

We are seeing an economic recovery, the consumption demand remains robust and incrementally the industry is going for capital expenditure as brownfield projects and tactical capacity addition. The infrastructure sector is seeing good work in railways, roads and port sector. In this scenario, things look to be on a path of recovery and hence creation of fresh NPAs seem to have peaked. However, while fresh NPA creation could have peaked out, there would be aging-related provisions and those resulting from RBI directive. For the last quarter (Q4FY2018), the RBI directive on NPA recognition should have a meaningful impact on net NPAs. This may necessitate further recapitalisation of select PSU banks.

Manav Chopra, CMT - Head Research - Equity, Indiabulls Ventures 

Where is Nifty headed in your view ? 

Nifty defends the key support levels and hints for a retracement rally towards the 10,450-10,600 levels.The index recovered immediately post the breakdown and defended the 10,100 support zone mentioned in the previous publications. With emergence of bullish reversal candlestick and price exceeding its previous week highs indicates a bullish reversal from the oversold levels and hints for a retracement rally in the near term. The weekly support of 10,100- 10,050 levels if held expects a possible rally towards the 10,450 and, thereafter, 10,600 level, which is the 38.2-50% retracement of the recent decline.

What is your Sensex target for December 2018? 

Sensex is in a long term rising channel formation and has recently observed a corrective decline from the recent peak. There is a strong support zone at 32,500, which is likely to provide cushion in the near term in case of decline. One can expect target of 35,100 by the year end.

Which index in your view will outperform ? 

Auto index expects relative outperformance and returns of 20-25%. The index has been in a long term rising channel since past 7 years. The current trend remains intact and is expected to test the upper end of the channel in the longterm. The expected target for the pattern is around the 17,400 and 18,200 levels, which is likely to be achieved by early 2019.

Nitasha Shankar, Sr. Vice President and Head of Research, YES Securities (I) 

What is your expectation on earnings growth in FY19? 

We expect earnings growth to be in the range of 14-15%.

Which sectors will outperform in your view in FY19? 

We remain positive on auto, auto ancillary, infra, farm mechanisation space, rural consumption themes, crop protection as well as building material sectors.

What are the key risks facing markets ? 

Mismatch of expectations of domestic retail investors and its impact on the fund flows towards Indian equities (through domestic mutual funds)

What is your Sensex target for December 2018? 

While we would like to refrain from giving an absolute value, we believe it will be difficult for the benchmark indices to make new highs this year. Stock-specific investing approach would be the way to go.

Lakshmi Iyer, CIO (Debt) & Head — Products, Kotak Mutual Fund 

What is your take on interest rate scenario in CY18? 

The RBI has lowered its CPI inflation projection in the recent monetary policy review meeting. Additionally, the recent reduction and spacing out of the govt borrowing programme has been a great boon to the ailing bond yields. If this trend continues, fiscal deficit would well be under control. This could mean a lid on yields on the higher side. We, therefore, expect yields to remain soft, albeit moving in ranges.

How do you expect the bond yields to behave in coming year? 

Given that H1FY2019 government borrowing is less than 50% of the total issuances, it offers respite to the rising bond yields. In that, the reduced CPI range by the RBI also offers a very high comfort to bond prices. We are of the view that policy rates in India could be on an extended pause, which bodes well for rates. Additionally, if we see further opening up of FPI limits, it could further accentuate the positive sentiment. The key would be to watch for crude oil prices.

Rahul Sharma Senior Research Analyst, Equity99 We believe the Sensex has potential to touch 38,000 this year.

Out of the last 26 years, the Sensex had a negative closing eight times.

Sensex on an average has given 2.58 % returns in April.

Where will Sensex go in 2018? 

Given the US President Donald Trump's haphazard decision-making so far, it is only logical to expect some increased volatility in the stock markets. Having said that, the negative impact on the stock prices in the US markets can be offset by the positive impact of the tax rate cuts on stock prices.

 
In India, the year ahead promises to be full of action as there are several local events that may affect the market sentiments. There are elections in at least five states and the outcomes of these elections will influence the market moods significantly.

With earnings expected to grow in the range of 15 to 16 per cent for Sensex stocks, there is a possibility that Sensex can reach 38,000 levels, assuming markets trade at similar P/E multiples.

Any positive surprise in the earnings front can push the Sensex closer to the 40,000 level. It might take both P/E expansion and earnings growth to take Sensex closer to 40,000 level. The current Sensex P/E is closer to 23, while it had touched 26.38 in January when Sensex was trading at 36,283 levels. A P/E expansion and earnings growth is what the bulls will be betting on in the coming year.

RBI monetary policy and interest rate Outlook for 2018 The ongoing nascent recovery in the Indian economy needs to be nurtured through stable macro-financial management. In line with the market expectation, RBI monetary policy and interest rate Outlook for 2018 The ongoing nascent recovery in the Indian economy needs to be nurtured through stable macro-financial management. In line with the market expectation,the Reserve Bank of India (RBI) in its first bi-monthly policy for FY18-19 kept the key rates on hold and maintained its neutral stance. The Monetary Policy Committee (MPC) also lowered inflation projections for the full financial year 2018-19, hinting that there would be a long pause in the RBI policy rates and there would not be any rate hike during the current calendar year.

The 10-year bond yield has fallen to almost 7.15 per cent which augurs very well for equity market. The 10-year bond yield approaching 7.7 per cent in February this year was one of the key triggers for the sharp losses on the Indian bourses. Now, falling bond yields should surely help earning multiples to increase.

Shailendra Kumar Chief Investment Officer,Narnolia Securities Limited

Although the RBI has lowered its inflation forecasts, the central bank still continues to sound a lot of caution on various macroeconomic aspects that are likely to pose upside risks to inflation. For instance, the oil prices continue to remain elevated as well as volatile. Also, there is not much clarity on how the higher minimum support price and related policies announced in the Union budget will be implemented. This could have a significant impact on retail food inflation. Further, the risk of fiscal slippage, at both the Central and state levels, still prevails. Furthermore, if the monsoon turns out to be deficient, it will have consequences for both inflation and government expenditure. In addition to the above factors, the growing tensions in trade relations and faster than expected tightening of monetary policy in the US can affect capital flows and con worsen the overall investment climate.

The latest monetary policy surely pacifies the nerves of Indian investors in an immediate sense. The fixed income investors are expected to continue to stay invested in the long duration funds.

The rising interest rates is a global trend and the fear amongst the investors is that the rising interest rates may affect the flow of portfolio capital into emerging markets, including India. The ‘carry-trade' portfolio money will be naturally affected due to rising rates and that may not augur well for equity prices

 "Crude Oil: Outlook 2018
Crude oil is expected to remain firm in 2018 owing to several recent developments such as -
1. Sanctions on Venezuelan oil industry
2. Tension between Saudi Arabia and Iran,
3. Global oil producers limiting supply,
4. Improving economic fundamentals and synchronised global economic growth "

Trade wars and its impact on equity markets 

Global equities are witnessing selling pressure owing to the ongoing trade war initiated by the US President Donald Trump. Such frequent talks on trade restrictions and tariffs on US imports from China has managed to pull down the global equities considerably. The worst hit index in past one month, since the trade war talks surfaced, has been Nasdaq, which is down by 8.54 per cent and Dow Jones Industrial Average (DJIA) which is down by 5.54 per cent. It remains to be seen how long the hostile trade environment persists. A full-blown trade war, which would be an extreme situation, could cost the global economy $470 billion, according to Bloomberg Economics. In a scenario where the US implements a 10 per cent levy on imports and the rest of the world retaliates, analysis by Bloomberg Economics says the global economy would be 0.5 per cent smaller by 2020 than it would have been without tariffs.

"Trade wars are Good and easy to Win" Donald Trump

"America – which accounts for 9 per cent of world exports and 14 per cent of world imports – is by no means a dominant superpower." Paul Krugman

The situation of a full-blown trade war, though less likely, cannot be ruled out either, owing to the political repercussions of such announcements by the US President.

At present, due to the increased volatility in the developed markets, the emerging markets have come up as safe havens for global institutional investors. The emerging markets such as India have been less volatile relative to the developed markets such as the US in past month and there is good chance of outperformance in the emerging market space in FY19 when compared to the developed world. This may lead to increased portfolio flows into markets such as India even after discounting the increased pressure from increasing interest rates globally.

Investors should keep in mind that while trade war fear affects mostly export-oriented companies (stocks), domestic stocks which have sales mostly in India have also reacted negatively. The fundamentals of these companies have not changed significantly, so the correction can be seen as an opportunity to accumulate more of these stocks at a lower price.

Before taking a negative view on the trade war fears, one needs to understand that nothing substantial has been announced yet by the Trump administration. So far only a 25 per cent tariff on US imports of steel from China and a 10 per cent tariff on the imports of aluminium from China has been announced. These announcements are nowhere near the threats that Trump had given during his campaign suggesting an across-the-board 45 per cent tariff on all imports from China.

There is a strong chance that the trade war fears will subside and the fundamentals will take over. Markets will start focusing on the core earnings as the sentiment improves.

IPOs :- The year gone by, i.e CY17, will be remembered as a great year for the IPO market, where as many as Rs.75,475.37 crore were raised, thus reflecting a whopping 65 per cent growth in the amount of money raised over CY16. The total number of companies that tapped primary markets in CY17 stood at 38, which is a good 31 per cent higher when compared to the year 2016. The CY18 promises to be yet another year where investors can anticipate quality issues hitting the markets. Already in CY18 Rs.19,070.28 crores have been raised so far.

 GOLD OUTLOOK 2018 Gold is generally considered a safe haven investment option once stocks start declining. Expectedly, the year 2017 was not as eventful for gold since equities and crypto-currencies were on a dream run. Although gold prices went up by 10 per cent for a day or two, the returns for the year was around 6 per cent. In fact, in the December quarter, the return from gold was just around 1 per cent due to selling pressure on gold during the last quarter as investors decided to park their funds in equities. Gold demand plunged 25 per cent in the September quarter after the government brought gold within the purview of the Prevention of Money Laundering Act. Although the annual gold demand was up 9 per cent year-onyear at 726.9 tonnes in 2017, it was still much lower than the five-year average of 810 tonnes. However, the scenario changed over the last few weeks after the US-China trade war kicked off.

On January 1 this year, gold was quoting Rs.29,525 per 10 gm, which went up to touch Rs.30,830 per 10 gm in the last week of March, increasing by over 4.4 per cent. In spite of such appreciation in value, sales of old gold in the first quarter have dropped by 35-40 per cent compared to the previous quarter, which shows investors' conviction in the yellow metal. The vigour in the activity in gold is expected to return around Akshaya Tritiya, which is on April 18 this year and is considered an auspicious day to buy gold.

Globally, the economies fared well in 2017 and the trend is expected to continue in 2018. As incomes rise, the demand for gold jewellery and goldconsuming technology products, such as smartphones and tablets, rises. Income growth also spurs savings, thereby increasing the demand for gold bars and coins. The interaction between investment and consumption results in gold's lower correlation to other mainstream financial assets, which makes it an effective diversifier. Also, according to the World Gold Council, the global gold-backed funds added 25.3 tonnes of gold over the first two months of the year. Additionally, Asian funds grew assets by 10 per cent, while Europeanlisted funds had outflows, with both regions reversing their 2017 trends. This interest is likely to remain high this year, because the reasons for which these investors bought gold-to hedge against overvalued markets and insure against the increasing possibility of a crisis-have not materialized yet. We expect gold to get back its sheen in 2018.

Unlike in CY2017, equity markets are likely to see higher volatility in CY2018. With the Middle East remaining volatile, we are likely to see gold outperform equity in 2018. R Sreesankar Co-Head - Institutional Equities,Prabhudas Lilladher Pvt

Technically speaking :- Gold: (USD/OZ) Since January 2018, gold, the brightest of all commodities, has witnessed a range-bound movement from nearly 1300-1355 levels. Weak global cues and simultaneously depreciating US dollar have together put gold prices in doldrums. Considering the broader view, on the weekly time frame, gold has formed a cup and handle pattern, which was initiated in the first week of July 2016. The commodity attempted to breakout at 1354 levels in January 22 week of 2018, but failed to sustain the levels on a closing basis and, since then, it has been moving in a range. Further 1300 acts as 50% retracement of the previous sharp upward rally from 1236 levels. Moreover, gold also has a flag pattern in the making, with the said range-bound movement after a sharp rally. Thereby, going forward, we hold 1350-1355 as the major resistance above which gold may test 1400-1455, followed by 1480 in the medium term. On the downside, 1270-1250 would act as the support levels.

Chirag Mehta Sr. Fund Manager - Alternative Investments, Quantum AMC Do you see gold outperforming equities in FY19 ? We have always recommended to have an allocation to gold at all times given its negative correlation to equities, which makes it an effective portfolio diversifier. So, for investors' asset allocation, it has to be an allocation to both gold and equities at all times. Having said that, there are risks galore to equities this year given deteriorating global and Indian macros. As we approach the national elections, there are risks such as higher MSP, rising inflation and fiscal slippages. Globally, with interest rates moving up, reduced liquidity from central banks and the possibility of trade war can impact risk markets. Given the macroeconomic and geopolitical backdrop, gold could well be poised to deliver returns over the medium to long term.

Are Gold ETFs attracting investors? Investors usually get convinced on an Investment after it posts a decent return. In other words, investors usually chase returns. Gold after a spell of losses for three years from 2013 to 2015, has generated positive returns for last two years, but not enough to attract investor attention. Although in the short term, there are some headwinds for gold given the Fed rhetoric of tightening, global macros have been increasingly turning supportive. So far, Investor selling has reduced significantly in gold, but they are yet to return on the buying side. History suggests that investors will come back once gold delivers sizeable returns .

Conclusion :- Dwindling amidst the winds of trade war, market correction and domestic reforms, the Indian stock markets are increasingly looking wayward and uncertain presently. However, the markets may register a significant turnaround, pushing the Sensex to over 38,000 levels on the back of good corporate earnings potential by the year end. While the unfolding of major global and domestic events on both business and political fronts may result in an extended bumpy ride for the investors in 2018, the seemingly strong earnings outlook for FY19 is portraying a brighter picture for equity returns during the year.

FY19 being a significant year for Indian politics, it may witness an increased government spending during the year, which will augur well for businesses as well as the Indian stock markets. The launch of major government schemes and a more aggressive implementation of government policies, especially infrastructural development, during the year will most likely put an end to the jitters of the investors.

Markets, which are already in the mood to factor in severe correction as seen in the first few months of 2018, may also throw up ripe opportunities for value investors and traders in 2018. The year must see a shift in focus of the investors from the index levels to individual stocks to reap the most from the markets.