The Indian equity markets did very well in 2017. Nifty was up 29.9%, in USD terms Nifty did even better as the Rupee appreciated. But fundamentally there was not much going. All this happened despite the economy slowing down, rising oil price, rising inflation and a bottoming of the interest rate cycle. Sure there was a huge inflow in the stock markets through the mutual funds, but according to me the major driver for the last year returns was what was happening outside India rather than in India.
| Industry | Global | 2017 | Indian | 2017 |
| Aluminum | Alcoa | 75% | Hindalco | 73% |
| Steel | ArcelorMittal –ADR | 49% | Tata steel | 84% |
| Mining | Vale SA | 56% | Vedanta | 49% |
| Rest of the Markets | 2017 |
| Hang Seng – Hong Kong | 34.4% |
| Nifty – India | 28.1% |
| Bovespa – Brazil | 24.8% |
| KOSPI – South Korea | 20.4% |
| MSCI – World index | 19.9% |
| S&P – US | 19.8% |
| Nikkei 225 – Japan | 19.8% |
| 2017 | |
| Brent Oil | 13.9% |
| Gold | 11.5% |
| Indian Rupee | 6.1% |
| Euro | 12.6% |
| Japanese Yen | 3.1% |
| British Pound | 8.3% |
| Australian Dollar | 6.7% |
As Bill Clinton’s 1992 campaign proclaimed “The Economy, Stupid”. After disappointing global growth over the past few years, according to the World Economic Outlook by IMF in October 2017, “the global upswing in economic activity is strengthening, with global growth projected to rise to 3.6 percent in 2017 and 3.7 percent in 2018.” The key drivers according to them have been a “notable pickups in investment, trade, and industrial production, coupled with stronger business and consumer confidence.” Also, they added that “the upward revisions to projections are broad based, including for the euro area, Japan, China, emerging Europe, and Russia.”
To add to the positive fundamentals was the abundant liquidity in the system due to years of globally synchronized monetary easing by the developed market central banks. Investors were not positioned for this synchronised growth and the surprise factor of the growth was the key driver of the markets and the Economy and Commodity related stocks across the world.
Finally, the geo political risks remained at the background and volatility across markets have been extremely low. Even though Fed raised rates, the pace and the tone was benign.
Indian markets participated in the global tailwind!
So what now? ….. The India story needs to deliver
According to most economists the broad based global growth will continue in 2018. Rising employment and Factors like US tax cut may also help. The one issue is that the surprise element of the current growth is no longer there. Global geo-political risks remain, risk of inflation and hence higher than expected increase of interest rates has gone up. Hence to expect the world to deliver another stellar year for the markets may be asking for too much. Hopefully we would still have a positive year, Fingers Crossed.
The rise in the Indian markets without the commensurate rise in earnings have made the stocks expensive unless earnings catch up. According to a recent article in Bloomberg, Indian market is the most expensive among all Asian countries. Thus, from the Indian Equity market perspective, it is time for the India Story to deliver. The tailwind of global markets, the huge flow of money of domestic money into the stock market directly and through mutual funds and the promise of long term story remaining intact, have helped the market to be patient with negative economic surprises. But this year may be different.
The bull case scenario for India is that all the negative economic disruption due to Demonetisation and GST are now behind us. With healthier bank balance sheets due to government recapitalisation, the major supply side reforms initiated by the government over the last three years and the big push towards infrastructure spend will bear fruit and a new Capex Cycle will well and truly begin. In this scenario the earnings will catch up with valuations and the Indian markets can do well with or without the Global tailwind. Of course, if Global tailwind continues then in this scenario bears will have to run for cover!
The bear case scenario for India is that the Economic slowdown is much more structural and is here to stay for longer. In this scenario the Indian market will find hard to perform and will need another round of global tailwind and if that does not materialise then we could see markets struggling. In this scenario bottom up stock picking will work better and investors will do well to focus on good quality companies with positive Financial trend and reasonable valuations. It is very difficult to say which scenario will play out. It is important to keep an eye on the global trends and the local factors. The interplay will decide the extent of stock market move.
Our base case is that we may see the Indian story starting to unfold and the global markets will be more volatile.
Wish You a Very Happy 2018 and Happy Investing from all of us at MarketsMojo.
Sanjeev Mohta
Market Expert
Sanjeev Mohta is the Market Expert at Marketsmojo. He has over 27 years’ experience in Investment Research and Fund management across Asian Markets and Asset classes. He has worked in various organisations in Singapore and India like Alchemy, QVT, Jefferies, ABN Amro and HSBC Securities. He Has a PhD in Economics from Tulane University, USA.