The year gone by proved to be quite volatile for equities compared to the spectacular run of 2017 (28 percent). However, it is notable that Indian equities still figured in the list of outperformers in both emerging as well as developed markets.
In 2018, India and Brazil were the only markets among emerging as well as developed countries that outperformed not only in local currency (3 percent and 15 percent, respectively) but also in dollar terms (negative 6 percent and 2 percent).
Despite multiple events lined up like state elections, US-China trade war, crude & rupee volatility, a liquidity crisis in NBFCs, mixed earnings etc, the market return was on expected lines, said experts who had forecast flat to single-digit return in 2018.
"The paltry 3 percent return for the Indian market (Nifty-50 Index) in INR terms and -6 percent return in USD terms simply reflects a bad starting point for the market in 2018 — (1) overvalued market and (2) overvalued currency," Kotak Institutional Equities said.
It further said the Indian market de-rated significantly through 2018 to 16.7X 12-month forward EPS from 20.1X at the beginning of 2018 and the INR corrected sharply against the USD along with most DM (developed markets) and EM (emerging markets) currencies.
The Indian rupee recovered sharply from its historic low of 74.45 to the dollar hit in October albeit to close the year down 9.5 percent at 69.76 a dollar.
Nonetheless, the Indian market was among the best performers in 2018 although the performance was varied across sectors and stocks, Kotak said.
The tide in terms of macro factors, especially crude, turned completely in favour of India as the country imports 80-85 percent of oil requirement. International benchmark Brent crude futures rallied sharply to $86 a barrel in October but oversupply and global growth concerns dragged it to around $50 levels, down 13.5 percent in 2018.
"Current macroeconomic conditions and valuations are quite supportive and drive our expectations of decent (10-15 percent) equity returns in 2019," Kotak said, adding the market is reasonably valued although the reasonable valuations reflect strong earnings revival over FY2019-21.
The first half of FY19 net profits of the Nifty 50 Index grew 12 percent, which imparts some confidence about FY19 profits, said Kotak which expects 14 percent growth for the current financial year and 27 percent in FY20.
"14 percent and 27 percent growth in the net profits of the Nifty-50 Index for FY19 and FY20, respectively, may look high but this largely reflects earnings revival in 'corporate' banks from a low base," the research house said.
On an ex-banks basis, it expects FY19 and FY20 net profits of the Nifty-50 Index to grow 9 percent and 14 percent, respectively.
Also, the rupee seems to be fairly valued, said Kotak which expects mild depreciation in 2019 compared to the sharp correction seen in 2018, it said.
Global and Indian equity markets will have to contend with several events in the first half of 2019.
"(1) The US Fed’s rate actions linked to the strength of the US economy will be a key variable; (2) The progress on China-US trade issues will be another variable; (3) the level of oil prices linked to further US action against Iran's oil exports will matter particularly for India's macro. (4) India will hold national elections in April-May 2019 and the outcome is quite uncertain post the strong performance of the main opposition party in recent state elections," Kotak detailed.
The research house made minor changes in its recommended large-cap model portfolio. It increased the weight of Axis Bank by 150 bps to 400 bps and reduced the weights for HDFC, Hindalco Industries and Mahindra & Mahindra by 40-70 bps to accommodate the increased weight of Axis Bank.
It added Cholamandalam to the recommended mid-cap model portfolio which covered stocks from several sectors - automobiles & components, banks, capital goods, diversified financials and gas utilities.
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