Indian Stock Markets (2018-2019)
What’s next for Indian Stock markets in the year ahead? Here are some factors that’ll affect the trend for majority of the year. But before we go into the details we should first get acquainted with how the markets work and who the main players are.
The markets have FDI, FII, DII, Volume traders, retail traders and retail investors as the main players. FDIs & FIIs invest based on the past performance and fundamental analysis of the markets. DIIs and volume traders invest and trade based on the trend and market sentiment (of course they employ fundamental analysis too but market sentiment affects their decisions more.) retail traders trad according to the trend and retail investors usually pump steam into the market. As understood by everyone but seldom acknowledged, retail investors are the backbones of Indian stock market since after 2008. (They invest based on the sentiment and brand-value and the belief that markets will perpetually ‘go up’ and they are the most reluctant to get out of their positions. This makes them the perfect stock buyers.)
Based on this information following assumptions can be made.
1. Retail investors and following them the DIIs will be bullish for the major part of the year. So unless there are more shocks like PNB scam, the markets will have an upward trend based on the habitual bullishness of domestic players.
2. The govt. data will be positive for the major part of the year. GDP, inflation, credit growth, deficit and value of the currency against reserve currencies will be stable, predictable and positive. As a matter of fact we will see picture perfect data since the elections are coming up in Apr-May 2019. Expect more reassurances from rating agencies such as Moody’s or the chairman of IMF or the president trump that India’s growth rate will be above 7.5. Apparently, that’s all that the markets need in order to grow.
3. Velocity of Money will continue to deteriorate since that’s the one indicator that never lies. For the last year (post demonetization) the velocity of money declined to 1.2 to 1.3. And if my estimates are correct, the value can reduce to 1.1 - 1.2 (fair bit of approximation is needed here because further devaluation of the currency is in order as oil gets costlier but the velocity of money will not reach the pre-demonetization levels anytime soon).
And now, we come to the predictions.
1. Since 2011, the markets are experiencing empty boom because of the habitual bullishness, PE ratios are 26 - 27 consistently (for nse) and 20+ (for sensex). While PB ratios are above 3 for NSE and dividend yield is about at low as it can be. (at approx. 1). In 20th century, this could have resulted in another great depression but this is not the 20th century, this is the glossy, shiny 21st century. There are already online articles about how a PE ratio of 25 to 30 can be a new normal. Which is great as much as the retail investor confidence is concerned. But wait till you hear that the increase in PE ratio for most firms is not only because of increasing share price but also because of decreasing earnings. We should thank our lucky stars for this is a situation present in almost all global markets. People (who measure the health of Indian economy based on the movement of stock indices) should pray that other markets don’t improve before India’s do. If all markets do equally bad, Stock indices in India can see 10% to 12% growth in the coming year.
2. Politics in India has been reduced to a scientific methodology. Every citizen of India can be stereotyped into a political faction and the sad thing is that most often the stereotypes are correct. Hell, you can now guess the political affiliation of a person based on the news channel they are watching. What does it have to do with markets you ask? Well, a lot!. First of all, the markets have reacted positively to the ruling party since the inception of the ‘acche din’ (good days are coming!) slogan. Whether or not the promises are kept is whole another story. Besides, the government and their PR arms have succeeded in flipping around every failure as a strategic success. Every bitter dose of the political and bureaucratic tomfoolery has been accepted by the majority population as a necessary medicine for the health of the nation. This includes some of the economic earthquakes such as the demonetization, long term capital gains tax and other necessary but hurried executions such as GST, overemphasis on ‘Make in India’, mechanical approach to the Non-Performing Assets (and their redistribution to the oligarchs) etc. They all affect one key factor, the ‘SENTIMENT’. DIIs and retail investors can’t keep the habitual bullishness going beyond a certain limit. If the core sentiment doesn’t improve, markets can nosedive and bleed out at least 20% of their value.
3. Based on the fundamental analysis of a few bluest of the blue chip companies, Debts are rising. In a turbulent situation (which can present itself at any moment, and that’s not just me talking) any debt to equity ratio beyond 0.4 can be hazardous. For most blue-chip companies this ratio is nearing 0.4. But then you look at their statement and find that ‘other liabilities’ or ‘miscellaneous liabilities’ are more than double that of the value of ‘liabilities’ in their statements. In short, debts are rising! There’s no need to push the panic button yet, since the ‘turbulent situation’ hasn’t presented itself yet. But in any case, this can result in only one of the two possibilities.
i. Higher debt and higher capacity results in higher earnings, improving the pe ratio a little bit. Which puts more steam in the markets based on FDI and FII interest.
ii. Downward pressures on the stock prices result in higher debt to asset ratios, downgrading the technically driven ratings of the bonds and other instruments of the blue-chip companies, increasing the interest rates. Which can turn a budding private-sector bond market into a junk-bond roller coaster.
4. ‘Trade wars’ is a favorite market buzzword nowadays but no matter how cool it sounds, it’s just another trumpism. Trade wars by themselves have no impact on the stock markets, since the major movement happens in the currency markets in the situation, which is less likely given the reduced earnings around the globe. Having said that, the real buzzword everyone should be discussing is ‘protectionism’. Protectionism is a politically correct synonym for fascism, and sadly, it is on the rise around the globe. USA is the Mecca for capitalism but politically they are experimenting passionately with the said ‘protectionism’ nowadays. If the attitude of the ruling class in the US spills over in the stock market, it can result in paranoid selling and subsequent market crashes around the globe. Again, there’s no need to press the panic button yet. Trump, reportedly, only pretends to be stupid; which he’s not in reality! He has a knack for dancing around the button without actually pushing it. But if any one of Russia or China chooses to flex their arms in areas other than the ‘trade wars’, Trump’s hand will be forced. Another major military conflict will result in 1. Increase in the oil prices and more steam in the stock markets in the long run despite consolidations in the short run. 2. Devaluation of dollar, which as experience would suggest, will result in RBI printing more Rupees in order to keep Indian currency devalued and subsequently causing inflation to rise. This will create an opportunity for Indian Markets to climb higher but also to fluctuate more violently since interest rates will also rise.
Janet Yellen had said that, ‘There will be no other recession within our lifetime.’ I agree, because if another financial crisis happens they won’t be calling it a ‘recession’, they will be calling it something else. So technically, there will be no other recession within our lifetime. I think, they will call it a ‘burnout’ this time. All indicators are suggesting towards a crisis called as a ‘burnout’ in a near future. But hey, no need to press the panic button yet! We are living in the world where the ‘be woke’ media is increasingly getting more mainstream than ‘the mainstream media’. Chances are, if the ‘burnout’ happens at all, most people wont even know about it since they will be pre-occupied with their duties towards their caste, religion or their political party.
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