This is what will sway Sensex and Nifty over the week

Get ready for a rough ride, Dalal Street. Though double-digit returns could be in the offing for investors in Indian equities when it comes to the financial year 2019, they will have to brave the twin thunderstorms of increased volatility and political newsflow, market experts told DNA Money. While the last fiscal saw fear factor surge only in the last quarter, accentuated by reimposition of the long-term capital gain (LTCG) tax, sharp swings are expected to be more consistent in the next 12 months.

Nifty delivered returns of around 11% during last fiscal even after recent correction.

Rakesh Tarway, research head, Reliance Securities, said, “We expect similar kind of returns from equity markets during the next fiscal too, but with increased volatility due to large political events. While the risk of higher yield may continue to persist in the year ahead, we believe a healthy double-digit growth in corporate earnings will aid markets to sustain high valuations.”

The street focus is clearly on politics, as the primary trigger.

This is true especially after the recent by-poll results that have opened up the possibility of a weaker mandate for incumbent BJP in next Lok Sabha election. Several states are going for elections, which will culminate in the General Elections 2019 scheduled for April-May 2019. However, that does not mean politics will totally dictate the trend.

Gautam Duggad, head of research, Motilal Oswal Institutional Equities, said, “Busy political calendar aside, we expect earnings growth to revive in FY19 after three years of flattish earnings on account of various disruptions (goods and services tax, demonetisation, Real Estate (Regulation and Development) Act, 2016, National Company Law Tribunal). Clean-up of the banking system and resolution of few NCLT cases will inspire confidence in the earnings recovery story. "

In the very short term, sentiment seems negative. Nifty has broken the 200 DMA (daily moving average) on technical parameters placed at 10178, which is negative for the markets. Bullishness will prevail only if Nifty sustains above the 200 DMA. The US markets are showing signs of correction, which could be negative for global markets, technical analysts say. On the fundamental side, the LTCG tax implication is now a business reality for all investors who are coming to terms with its costs and complexity.

Smart money right now is on large-caps. Valuations for large-caps, while not lucrative, are no longer rich after the recent correction.

Rusmik Oza, head - midcaps, Kotak Securities said, “The whole of FY19 is expected to be volatile unlike the one way rise seen in FY18 till the Budget. After more than 10% correction in the Nifty, many large caps have come in the ‘Buy’ zone and risk-reward ratio of large caps has improved and become favourable. The downside in Nifty or large caps could be in single digits from here on whereas the potential upside could be in double digit. However, we could see double-digit correction in mid-cap index and mid-cap stocks if we see the single-digit correction in Nifty or large caps in future. We expect large caps to outperform mid-caps in FY19.”

An important event to watch out for is the monsoon. Experts said till we do not have a normal monsoon, Indian markets could remain volatile with a downward bias. Post monsoon, there could be some recovery if the government is able to pay farmers liberally and alleviate some of the farm distress seen in the rural side.

Rising interest rates by Fed could also disturb the FPI flows into emerging markets. In this background, India needs domestic flows led by mutual fund SIPs to sustain in coming months.

Globally, the trade war between the US and China could escalate in the coming months of FY19 but as of now, market wizards see limited impact on India.

That said, bond yields will have a direct correlation with equities.

Rising bond yields will be negative whereas falling bond yields will be positive for equities. Looking at the Fed stance on interest rates, it seems US bond yields could harden in the coming quarters.

Duggad likes private financials, discretionary consumption, autos and select IT and oil & gas names as key stock plays for FY19.

Sanjay Mookim, research analyst, DSP Merrill Lynch (India), feels that rural stock plays could do well.

“With valuations and earnings expectations still high, Indian equities can continue to struggle the next few months. Within this setup, we believe stocks/sectors linked to rural India should do relatively better.”

Mookim added that sectors exposed to rural India (two-wheelers, cement, staples) should do relatively better. Among covered stocks, he likes M&M (Mahindra and Mahindra), Hero MotoCorp and Hindustan Unilever.

For investors, asset allocation will be the key. Abhijit Bhave, CEO, Karvy Private Wealth, said judicious asset allocation coupled with diversification of holdings should be the motto of investors in this financial year.

“In equities, we prefer a bottom-up approach to stock picking and concentrated portfolios comprising stocks with visible earnings growth. Investors should invest in equities in a staggered manner through various routes,” Bhave added.

Source: DNA Money