What to expect from Indian Stock Market in 2018?

Equity markets have had a good run in 2017 with many markets across the globe hovering near their lifetime highs. What are the Indian Stock Market expectations in this New Year? Going into 2018 traders and investors would be looking at a similar performance from the markets. However, as the disclaimer in mutual fund advertisement goes, past performance is not a guarantee of future performance. In other words, no one knows what the future holds, not even the best fund managers who work with seven or eight-figure salaries.

But, that doesn’t mean one should not attempt to know what to expect in future. All businesses go through the exercise of budgeting which is basically preparing for the future. Similarly in trading and investing one can prepare for better prospects and gains by scenario planning.

As Nassim Nicholas Taleb said in his famous book The Black Swan, “An event that is unplanned or unforeseen is a Black Swan event.” Thus barring the black swan, one can look at all possible events which can help us to be prepared for it in a better way. This will help us to be proactive rather than reactive to any eventuality.

We shall now look at what can the Indian equity markets expect in the New Year 2018.

Indian Stock Market Expectations for 2018

1. Liquidity:

Since the Lehman crisis, the thing that has been holding the financial markets is liquidity. Central banks across the major economies in the world resorted to an exercise of infusing liquidity which was known as quantitative easing (QE). This money found its way into financial markets, including equities. Indian markets too benefited from the flows.

However, USA was the first major economy to reverse the flow in 2017. Money was getting sucked out of world markets, especially from emerging markets. India too saw foreign money being withdrawn from the markets, however, was saved by an event that was widely criticised. Demonetisation of high denomination currencies, resulted in cash that was earlier hoarded, finding its way into the banking system and through there in the markets.

For 2018 to sustain the rally of 2017, it is critical that the flow of money domestically continues to enter in the financial markets. With around Rs 5,500 crore of systematic investment plan (SIP) entering the market every month, the flows seems strong. If international flows support domestic flows, markets can touch the new high in 2018.

Excess liquidity has been pushing markets higher despite fundamentals not supporting the optimism. It would thus be necessary to keep a very close check on the flowing taps.

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2. Government impetus:

With only one year to go for the next general election, the government would like to step on the pedal in its reforms announcement and more importantly in implementation. The sectors that will be in focus during the year will be all the employment generation ones.

Agriculture, textiles, and construction will be the sectors in focus in 2018 as government goes out with all tools blazing to infuse and increase job opportunities in the economy. With inflation rising, both core as well as fuel inflation, it would be very unlikely that rates will be reduced. Bonds yields definitely do not indicate any rate reduction anytime soon.

Banks with recapitalisation from the government and their own effort of raising money from the market will be in limelight. The sector is increasingly important for the broad market since the recent change in the index will result in finance sector accounting for nearly 45 percent of the broad index. This sector will play an important role in how the market plays out.

3. Guidance:

If one goes by the rating agencies, the bottom of corporate earnings is already made. There are more rating upgrades in corporate India than downgrades. This would suggest that numbers are likely to improve going forward. Many analysts expect a J-curve improvement in corporate number. If this really happens, 2018 will be a year to remember for the markets. Growth numbers will attract foreign investors by the truckload. With domestic money already on the dance floor, if foreign money joins in we can have a rocking year in 2018.

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4. Downside risk:

While the scene does look rosy from the window, currently one needs to look at what can go wrong in order to be prepared. One such thing is crude oil prices. Crude oil prices are already very close to RBI’s high-risk mark of $65 per barrel. Higher oil price will result in inflation rising, which in turn would compel the central bank to raise interest rates.

Minutes of the recently held Monetary Policy Committee (MPC) of the RBI to decide on interest rates shows an indication of increasing rates.

This would result in increasing the cost of manufacturing for corporate India and can push down demand for consumers. With interest rate rising money can also flow out equity markets to debt markets as the risk-reward shifts for the two financial instruments.

The other risk is the outcome of state elections. There are eight states that go in for elections in 2018. Any unexpected results can send panic signals amongst investors.

Events in the global economy can result in speedy withdrawal of money by foreign investors. One such event is the BREXIT, which continues to rattle UK and the entire Euro Zone. Political uncertainty and the refugee crisis which continues to shake up European countries are likely to have its impact on the markets.

However, the news flow from US is likely to continue to remain positive as the country has announced a massive corporate tax cut which will be reflected in higher profits. Some companies have decided to pass on the benefit to its employees which in turn will affect consumption in the country. US consumption will continue to drive global economies, especially its main trading partners like India and China.

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In conclusion:

While the macro-economic scenario will support a market rally, the main headwind that can impact Indian markets is political activity in the country, especially the eight state elections. In the US, markets follow a cycle called the ‘Presidential election market cycle’. Markets are generally higher in the year elections are held as government spends rapidly to boost the economy and announces various socialist schemes. The way things stand Indian markets may have its own election cycle this year.

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What is your take on the performance of equity in the previous year? What are your expectations and vision of the Indian equity market? Feel free to share your valuable feedback in the comments section.