Nifty outlook for 2018 – Troubled but with some hope

When I look at what has happened in 2018 with the Nifty so far, I definitely get a sense of deja vu. A decade back in 2008, the Indian markets were flying high with the Nifty having crossed 6000 in January. At that time too, there were global rumblings on the sub-prime crisis, though the Indian context was not really an issue. We all know from history what happened. We went into a sharp and brutal correction initially, followed by years of listless performance till 2014. What many investors are worried of now is whether there is a chance of history repeating itself and , more pertinently, what is likely to happen in 2018. Let me try and share my observations in this post.

To begin with, let us understand one major difference between 2008 and 2018. In the former year, Indian markets had a very strong dependence on FII money and they could crash the market by pulling out whenever they had any inkling of bad news. Over the years, with the domestic retail money coming into the market through SIP in Mutual funds, the dependence on FII money has reduced a lot. As of now we really do not know how the domestic retail investors will behave when they see sharp cuts in the markets. In the past few years, they have not panicked when there were some cuts but what we are looking at now is going to be more serious. My own take is this – given the increased knowledge about goal setting and financial planning, it is unlikely that there will be panic on a large scale. Yes, some people will book profits and take out money fearing deeper crash, others will lower their SIP contributions but these will not be impacting the markets in a serious way.

So what are the factors that will play a greater role? As usual one will have to look at performance of earning as well as the news driven sentiment in the markets. I can think of the following issues for 2018:-

  • The society and the polity are clearly divided along serious fault lines in India. The opposition will oppose everything and even try to manipulate to have any chances, the government is in no mood to listen to any advise, even if it is good one.
  • The impact of the budget will be important for elections in 2018. If BJP wins in Karnataka along with some North Eastern states they will be tempted to call for an early election. I somehow think this will not happen though and the General elections will be held in 2019 only.
  • The elections will definitely be fought along 2 large blocks in 2019. Throughout 2018, the election results for the states will have a high impact on the markets.
  • Budget implementations, especially on the GST and welfare schemes will have a positive impact on the markets.
  • Earning growth is clearly starting to happen now. If this goes well in the next few quarters, the Nifty will shrug off the current panic and move forward. However, this will not be the year of decisive growth, it will be incremental at best.

With these factors playing out, how do I see the Nifty move through 2018? Well, to start with, I think it will go down to 10000 or even 9500 over the next 2 months. If the yearly results are good and some of the election results and GST figures show BJP in a good light, recovery will start slowly. Even then, any decisive move is only likely if the BJP wins the Karnataka elections – this looks quite difficult as of now. In the absence of such a win, this will be slow going year for the Nifty, waiting for triggers in the form of quarterly results. Assuming that the current trend of earning improvement continues and there is a good monsoon as widely predicted, Nifty will probably recover at a faster pace in the latter part of the year. Here are my predictions for the Nifty then:-

  • 9500 by March end 
  • 8500 by May end if BJP loses Karnataka to Congress
  • 9000 by July end with good monsoons, GST collections and Q1 results
  • 10000 by October end with good agriculture news, welfare scheme implementations and earning growth for H1
  • 11000 by December end if BJP wins at least 2 out of the 3 state polls in Rajasthan, MP and Chattisgarh.

In a pessimistic scenario many things can go wrong – Oil prices can continue to rise, inflation can get out of control, Monsoons may play truant, earning growth may be muted and BJP may lose most elections. In such a scenario Nifty may well end the year 2018 languishing at around 9000 range.

On the balance though, I think we will be getting back to 11000 though the route will be rather tortuous as I have described in the post.


The impact of budget on your investments

When you are in the middle of a storm it is difficult to stay calm. The immediate aftermath of the budget yesterday has been a sharp fall in the markets – the fall is significant for the Sensex and the Nifty and brutal for the mid cap and the small cap indices. I thought of writing this post about the overall impact of the budget on your investments but it will probably be a good idea to start with the markets first.

Now as any of us who have been in the markets for some time will know, the markets do not like surprises. In the budget of yesterday, there were 2 elements which were not really surprises, yet the markets were hoping against hope that they will not take place. The first is the fiscal deficit figure whose importance is really in how the world views us financially. Not only have we not met the projected 3.2 % but, what is far worse, we are pegging the next year target too at 3.5 %. The financial discipline which was the hallmark of the last few budgets seem to be slipping. The second is of course taxing of LTCG for equities. While this had to happen some time, the markets are clearly shocked at it being done now and in not doing away with STT. Out of the two factors, the first will spook the FII’s and the second will be more of a problem for domestic investors. It was therefore expected that the markets will fall today, but the extent of the fall has been shocking.

Let us take a look at the LTCG part in closer detail. There are several issues in it which have not been understood well. By and large, people investing in stock markets are the relatively better off people in our society as compared to those who do not. It will be unfair not to tax LTCG at all, given the increasing income disparities we are seeing in society today. So if the government had to run welfare schemes such as Ujala and the Health scheme the money had to come from somewhere. This was the obvious choice and the other was raising the cess from 3 % to 4 %. I am a little surprised that LTCG period has only been kept at 1 year. This along with the little difference from the STCG rate will mean that there is really no incentive for holding equity long term.

Let us now look at what it means for investors in tangible terms:-

  • All your gains made so far are well protected as the price on 31st Jan, 2018 will be taken as the cost price. Though you will be charged for future gains from this price, your current valuation of portfolio is protected.
  • If you sell your stocks and MF in the next FY, it will be possible to structure the sale so as to minimise the taxes. For example every one of us will have some stocks in our portfolio which lose heavily. This will be the time to square off these losses with the gainers so that you do not have to pay much taxes. 
  • As far as MF goes most of us are doing it for some long term goal and we can just continue to do so. Yes, you will pay some taxes on future gains but not on your past ones. Investors doing SIP should simply continue, you may now want to bump up the amount by 10 % to take care of the taxes when you redeem. Note that this is mainly true for the Growth option.
  • If you have chosen the dividend paying option in your MF investments then the DDT will come into place from April. You will now roughly get 10 % less dividend as compared to what you were getting earlier. If this forms part of your passive income then you will need to secure this gap from somewhere else.
  • Indexation not being there is a good thing as you can simply sell it now at any point in time, without worrying about the indexed cost price. In any case, indexation works best with debt products where the returns are linearly unidirectional.

In summary what should your actions be?

  • Clean up your portfolio by selling stocks you do not want to keep, especially if they are losing money. Make sure that your overall gains after squaring off the lasses are not more than 1 lac so that you need not pay any taxes next year.
  • Continue with SIP in your MF investments, look into increasing the monthly outlay to take care of the eventual taxes.
  • Dividend option in MF schemes is a bad idea now. You will be paying DDT twice and again pay taxes on LTCG. Go for the Growth option, if you need money you can simply sell off some units.
  • Rest of your investments in Debt etc can continue as before.

So you will see, there is no real reason to panic at all at an individual level. The markets are doing so as they had gone up a lot and would anyway have corrected. This bad news has given it a reason to do so now. If it was not this it would have been something else.

How will Indian economy and markets fare in 2018?

The Indian economy and the markets are poised at a very interesting point. Throughout 2017, the markets were on steroids supported mainly by the huge influx of domestic money coming into SIP. The economy was a different story – there were structural reforms such as GST carried out but our growth was decidedly sluggish and the improved earning many had thought was just around the corner did not materialise. Will this change in 2018? What are the contributing factors and how are they likely to play out over the course of next year?

To begin with, the GDP growth fared a tad better last quarter as compared to the prior one. However, if one looks at the subsequent IIP numbers and the exports data, it is evident that there is not a great deal to be enthused about as yet. Agriculture too is a big concern at this point of time. If you add inflation and fiscal deficit to this mix then a growth rate of 7 % will not be easy to achieve, though it is probably still possible. From a revenue perspective the GST implementation is getting better and it can be hoped to achieve stability by the end of the fiscal year. The recapitalisation of banks, bankruptcy laws and reduction in subsidies are all steps that will stand the economy well in the medium term. However, in the short term these can all cause a fair deal of pain.

In the above backdrop, there has been some positive signs of earning growth. With the monsoons having been normal largely, rural growth has revived to some extent. At the same time agrarian distress is also a fact of life. Farmers are not getting the right MSP and are unable to service their loans. While loan waivers cannot be a solution at all situations, there is a need to manage this in some manner. Consumer goods and Auto sector have largely been buoyed up by increased demand and this is also reflected in their stock prices. Infrastructure spends and affordable housing are two great growth stories that will play out in the next year. If the overall earning growth revives in 2018 it will obviously lead to sustained growth in the markets.

One critical factor in India is always the budget and this is determined, more often than not, by the political context. As of now, the BJP is quite wary of the opposition getting together to thwart their relentless march. Given that this is likely to be the last full budget, there is a good chance of some cheer being spread. On the taxation side this may mean some relaxation of the rates on both personal and corporate income tax. This will put more money in the pockets of the people, thereby boosting consumption. Increased spending in infrastructure, education, healthcare, housing are likely to take place. All of the above should have a positive impact on the GDP figures, assuming that inflation is contained and there are no negative news on the monsoon front.

Assuming the above plays out what will be the impact on the markets? Well, for one, the markets can very easily get spooked if the BJP loses any of the important elections of 2018. The smaller north eastern states will not matter too much but if the BJP loses in Karnataka, Rajasthan or MP then the markets may well correct fairly deep. We all saw what happened when BJP trailed in the initial counting of Gujarat votes. One key assumption in the markets is that the current initiatives will continue and that is possible only if the BJP remains in power. Businesses are very clear that any alternate party coming to power is going to be largely detrimental for the economy. Now rationally BJP cannot win all elections but any elections that it loses will see deep correction.

Given the significant rise of all our indices in 2017 and the above complex scenario, it is safe to assume that the growth will not be as spectacular. However, it is still likely for the Nifty to be at a level of 11000 to 11500 by the end of 2018. The path to it may be tortuous though and Nifty may well test levels of 9500 or even lower, should something unexpected happens. Individual stocks may see greater purchase and it will therefore be important to look at these too in addition to the MF route. The downside protection of indices is fairly robust, given the overall strength of the economy as well as the huge amount of money being pumped in through the SIP route in MF.

If this holds true, how should you be investing in 2018? I will cover that in the next post.

Investment ideas of 2017 with potential high rewards

As I have written regularly in my blog. I do not believe in reinvention of the wheel. When I want to decide on where to invest, I do not fire up a spreadsheet and do all kinds of calculations to arrive at a conclusion. I think it makes a lot more sense to go with people who are professionals and do this for a living. As such, I have been watching a lot of television shows lately having Analysts and have benefited from their ideas.

Before getting into specifics of each asset class investments, let us look at the overall situation in the asset classes first. Equity has done quite well last year and is likely to continue the trend for the next 2 years. A Nifty level of 10000 plus is almost a given and how far it will go from there remains to be seen. Debt had also done rather well last year but with the interest rates almost bottoming out now, it is unlikely to repeat these returns in the current year. As far as Real Estate goes, it is definitely a good time to buy a house if you plan to stay in it. However, if you are looking at RE for investment purposes, I will not recommend it at all. Rental yields in India are still quite low and with the recent cap on interest expense that can be charged off, it just does not make sense. Gold is never really on my radar for investing, so I will not comment on it.

Specific to Equity the following factors are at play right now:-

  • Markets are fairly valued if you see that they are at 17 times 18-19 earnings.
  • ROE of top rated companies are at 12 % and this needs to improve.
  • With economic activities increasing, consumption will be on the rise and capacity utilisation of companies will pick up, leading to better margins.
  • Investment through retail is increasing and ticket sizes of transactions are going down. This is a healthy sign from an investment perspective.
  • As savings increase in the economy, more money will inevitably find its way into equity. Real estate is no longer a favoured option for the retail investor.

Based on this the following calls can be taken for the current FY:-

  • Infra stocks are likely to do well between now and next General elections, driven by the aggressive outlays in this area. You can look at select Infra stocks or go with a MF scheme with focus on Infra sector companies.
  • IT stocks have been beaten down, primarily due to issues related to the US situation. These are good companies, going at fairly good values now and are definitely worth a contrarian call. Pick up good IT stocks or invest in a good MF scheme with technology focus.
  • Pharma stocks have had a similar fate with their pricing woes and the FDA situation from US. Again, these are good companies that will do well in the long run. Also worth a contrarian call with both direct buying as well as a Pharma MF.
  • Dynamic asset allocation can be a good option for people who are not inclined to look at asset allocation route. ICICI Balanced Advantage fund or Franklin PE ratio fund can be good choices in this regard.

The calls here do have a higher risk as compared to the plain vanilla SIP most of you do, but the rewards will be significantly higher too. If you have the stomach for it, I suggest you go for it in this year. I know I will be doing so myself.

MF buying, index levels and 2017 outlook

To begin with, let me state that I was rather impressed by the readership of my last post as well as the comments posted. I have tried to respond to the individual ones but felt that it would be a good idea to address some common issues. Even before getting into it, let me state that I have no pathological dislike for SIP – in fact as a marketing professional, I feel that SIP has been an outstanding marketing success, so much so that many people even think that SIP is` the product they have invested in !! My only objection comes from the basic fact that SIP is a completely wrong way to buy equity as an asset class.

Let us now get to the objections. They are broadly as follows:-

  • SIP is easy for salaried people as otherwise they cannot say whether they will spend the money or not – I hope this issue is addressed through the real life case study that I shared.
  • People will find it difficult to keep track of index levels etc.
  • How do I know that Nifty will simply not keep climbing and reach 9000 and beyond levels, thereby not giving a chance for people to invest in MF.

In order to understand this, we will need to look at historical levels of the Nifty over the last 2 years or so. 

  • On February 7th 2014, Nifty was at 6023. This was the low point of the UPA and it started to rise from there.
  • On May 16th 2014, after the win of Modi and BJP Nifty hit a level of 7203. At that point most analysts predicted 9000 levels quite soon.
  • On March 5th 2015, Nifty hit a level of 8937. For the first part of Modi regime the Nifty had climbed almost non stop with only occasional blips.
  • On Jan 1st 2016, it was at a level of 7963 and kept going down to below 7000 on the day of the budget which was 29th Feb 2016.
  • Nifty ended 2016 at a level of 8185.

You can see from here that the Nifty has really moved nothing in the last 2 years. Yet we expect it to move by 2000 points or so and that too continuously? We might as well believe in fairies and ghosts 🙂

Coming to the current year, we clearly need to understand that the whole rise and fall of Nifty and other indices are largely FII money driven. With the US and some other markets doing well there will be tough choices for the FII brigade as to where they should put in the money. If the stability of the government and the policies that it espouses seem to resonate well in terms of BJP doing well and the economy showing high growth in terms of the corporate earning then Nifty may well climb again. 

So what is likely to happen? Right now, Nifty fair value is sub 8000 but it is very likely it may have a run up in the period till the budget. If it crosses 8600 or so that will be a major victory for the bulls and may push it up even beyond 9000. However, that is unlikely and I think Nifty levels will oscillate between 7900 and 8500 depending on the budget outcome. If BJP loses UP in addition to Punjab then 7900 is very likely to be breached on the downside. In any case, corporate earning in this calendar year will only improve in Q3 or so due to the demonetization effect and therefore Nifty will probably rise in the last 3 months of the year, given the revival of FII interest in our markets.

The route from today is thus likely to be as follows, 8300 – 8000/8500 – 7700/9000, 8400/9500. I personally think a 10 to 12 % return on the Nifty is quite possible from the start of the year when it was around 8185. Given this it is clear that you do not want to buy at levels of 8800 and 9000 and subject your investments to another year of mediocre returns. That is what they had in 2015 and 2016 when you bought at high levels through SIP and are now seeing much lower levels.

From my perspective I bought in 2016 at very near the lows of the year and avoided buying for most part till the very end. In this year too, I am hoping to buy in the sub 8000 levels of the Nifty and hopefully much lower. In order to do this we will need to track the Nifty over the months and have some idea about some directional trend.

The point is, even if you do not get any chance to invest and have the money in Arbitrage funds you will still make 7 – 8 %. This is more than what the Nifty has done over the last 2 years. In reality the markets will always give you opportunities and you just need to be aware of these.

Let me address this in the next post.

In 2017 politics will decide market movement

Even a casual observer of the stock markets will know that there is a close link between politics and the market performances at most times. Market movements are often decided by news flows and in many parts of the world, particularly in India a lot of these news are from the political arena.

Till about 2 months back the narrative in the markets depended largely on corporate earning growth and the US Fed rate hikes. Both of these were thought to be determining factors in how the FII buying would pan out. As our markets depend a great deal on FII inflows, the overall consensus was for a dip in the start of the year and a pick up as time went by. The budget was likely to be a positive one and a Nifty high of 9000 plus sometime in the first half of the year seemed a definitely possibility.

Demonetization and the subsequent political realignments have changed all of this greatly. At a basic economic level it is clearly visible that several sectors have been affected badly due to liquidity issue and also the overall sentiment regarding consumption has a negative bias now. The FY 17 earning growth is therefore likely to be fairly flat, belying the promise that was evident till the second quarter. The government can point to the tax collections but markets will only consider the growth in corporate earning and that will not be good.

At a purely political level, the exercise and the subsequent coming together of disparate political parties in order to challenge it has created a somewhat unstable situation which is bad for the markets. In general the markets like status quo and is worried whenever some negative disruptions take place. The election dates being announced for the 5 states have made the situation more complicated. It may mean that the budget is delayed and the current political climate also makes the GST roll out difficult by April 1. 

And then of course, there are the elections due in 5 states. They were always going to be important but with the demonetization backdrop, they have virtually become a referendum on the Modi government. Should the BJP lose significantly there will be serious questions on whether the policies Modi wants to practice have any resonance with the citizens of the country. Such type of political uncertainty will inevitably see FII outflows and deep market cuts. How is it looking currently? Well, the BJP will probably retain Goa despite an upsurge from AAP, lose Punjab where their partners have a lot to answer for, win in Uttarakhand where the corrupt Congress government has definitely run their course and may continue their North East success with a win in Manipur.

As often in the past UP will have a huge say in Indian politics – win it and BJP will claim all their policies are a success. Lose it and they will have to be on the retreat for the next 2 years till the general elections are due. In the first scenario both the Economy and the markets will revive quite well in the latter half of 2017. The FII buying will resume with enthusiasm. In the latter scenario a likely sell off from the FII’s will be accompanied by deep red in our markets, maybe even a crash.

In the latter part of the year Presidential elections and the different cases the CBI is pursuing against opposition leaders in different parties will also have a bearing. With good wins in the elections the BJP will be able to deal with these easily, losses will dent it’s moral authority and they will need to be more conciliatory with the opposition in order to get things done. Also there are 62 Rajya Sabha seats to be decided next year, if the BJP can get most of these and strike a deal with AIADMK then their Rajya Sabha woes can be largely over. This will leave them a few months to pass whatever legislation they want and go into the 2019 elections in a confident mood. In Indian politics, the road to Delhi always passes through UP , this year will witness that once more.

How will Nifty be affected in the different scenarios? There are a lot of alternatives to be played out, let me address that in the next post.

How will Nifty behave in the next year and why

It is rightly said that predicting the market levels in the short to medium term is fraught with the hazard of you looking really silly. However, the trends in the market are easier to predict and, with some knowledge and experience in the markets, you  will probably get it right more times than you get it wrong. Let me therefore attempt to try and give some overall predictions of the NIFTY trends between now and March 2018. I have tried to keep all explanations in simplest of languages and devoid of any jargon.

To begin with one will need to understand the key factors behind market performance in our situation. The determining factor in the markets is the amount of money pumped in and out by the FII’s. Most people do not understand this and keep looking at other reasons which are not quite so important. Now, the FII money will come in when they feel putting money in Indian markets is going to be better for them as opposed to other developing or developed markets. However, it can also go out when it becomes apparent to them that some other markets are relatively more attractive.The other important factor for the markets is of course the growth in corporate earning. As we all know real growth or the potential of it will help market up move and vice versa. The third important factor is some structural issues in particular industries, for example Metals, IT , Pharma etc. This may not effect all companies but if the sector has a good representation in the Index then the impact on the market levels can be serious. The final factor is sentiment based which is normally news driven – again either real or perceived facts.

So what is the environment really telling us right now. While there are many issues the most important ones are as follows:-

  • The US elections are expected to result in a win for Hillary Clinton. If Donald Trump manages to pull off an upset that will be a shock for the markets. This will be a bad news for Emerging markets as more money may flow into US at our cost.
  • The Fed rate hike is a given and this is again a negative trigger for the FII money to see a sell off.
  • Our own interest rate cycle is probably bottomed out or there is at most one more cut amounting to 25 bps. The bad news is that the stock price movement in the rate sensitive stocks we have seen lately will now come to an end.
  • Sectors such as IT, Banking, Pharma which are vital to the NIFTY are having serious structural issues now and are likely to see serious declines.
  • In general corporate earning growth has again disappointed this quarter and now the whole pressure will be in the next 2 quarters to deliver this FY. Given the indicators in most sectors this does not look very likely.
  • Auto sector, Consumer durable and the FMCG sector are likely to do well based on the good monsoons and 7th Pay commission outcomes.

As you can see from here, there are very few factors which are positive for our markets. I think the trend is clearly going to be negative and a 5 % correction on the Nifty is quite imminent. In case there is a major FII sell off then the correction will be way deeper and it can easily be 10 % or more. Over the next six months local factors such as the budget, assembly elections, GST implementation etc will hold sway and the outcome of most of these are again likely to be negative for our markets. I therefore anticipate further weakening of the Nifty till March of 2017 or so. Thereafter, assuming that there are no real shocks for the rest of the year in the global economy and markets, money is likely to flow into the Indian markets and we should end 2017, probably at the highest point of the year.

What are the Nifty levels we are talking about? Probably a low level between 7000 and 7500 by March 2017 and a high level between 9000 and 9500 towards end 2017. While the level of 7000 can be breached I do not feel this will happen for the 9500 level. Do remember that levels are far harder to predict and all numbers here should be taken as indicative and not absolute by any means.

Assuming that this is a reasonably accurate projection of the next 15 months, how will it be affecting your existing investments ? How will it make sense to invest in this period? Let me address it in another post.