In March 2017, we first put out a presentation on why the Sensex will touch 40k in 2019. The Sensex was trading at 29,000 levels when we put out our analysis and it is trading at record high levels of 38900, a gain of 34% since March 2017. The Sensex and the Nifty are creating record high levels everyday and is just off by around 3.5% from 40,000 levels. Hence for all practical purposes our target of 40,000 has been reached.
The question we ask ourselves as we position your portfolios is where will markets go from here? We are seeing risks ahead in the form of a) political risk as 2019 general elections approach b) Interest rate risk as RBI and global central banks look to raise rates c) Currency risk on INR depreciating to all time lows on high trade deficit due to rising crude oil prices d) geopolitical risks on trade wars, China hard landing, run on currencies of countries such as Turkey and Argentina, Russia sanctions and middle east issues.
On the positive side, strong corporate earnings, pick up in domestic consumption ‘leading to early signs of investment demand, strong economic data in terms of tax collections, GDP growth and industrial production growth, inflation expectations staying stable with CPI inflation around 4% to 5% levels and strong economic growth in US and Eurozone.
The risks and positives seem to be evenly balanced at this point of time but if risks start to increase, it may tilt the markets towards a correction.
Given this scenario, we will position your portfolios that can ride out the risks and continue to deliver long term growth.
The Rise to 40k
The Sensex and the Nifty has rallied 27% and 28% respectively in 2017 due to factors such as strong macro fundamentals, political stability and global liquidity. The year 2018 began on a strong note backed by strong economic data and solid earnings growth but was later dampened by worries about an impending trade war between the U.S. and its key partners.
The target of 40,000 for the Sensex has been reached and the reasons for the same are as follows:
- India’s biggest reform since opening the economy in the 1990’s is the launch of GST (Goods and Services Tax), which takes the country on par with the developed world on Indirect Taxes. GST continues to hasten the speed of India’s growth leading to surge in equity valuations.
- India’s political climate looks strong with the Modi led BJP government sweeping state polls in key states.In the recent “No confidence motion” had shown how fragmented the opposition parties are and BJP had won votes with widest margins. The market will play for the government to get voted to power in the general elections in 2019.
- Corporate earnings growth for Indian companies is showing the new leaders that will drive the markets higher. Index heavyweights like IT companies and Reliance Industries have outperformed markets in 2018 (YTD) There is also strong traction seen in niche financial services, transportation, retail, consumer durables, road construction and also select companies across sectors.
- Indian Companies have posted strong Q1Fy19 earning figures with relatively strong future guidance and Q2Fy19 earnings are also expected to be on the same trajectory. This also indicates higher corporate tax for the government which would be used to bridge the deficit gap. Corporate tax for the month of June 2018 surged by 17% (Y-oY).
- Globally, tech giants are showing extraordinary growth that does not seem to be slowing down. Tax rate cut from 35% to 21% would continue to boost profitability and margins for many of the U.S companies. The US unemployment rate rose to 4% in June 2018 from 3.8% in the previous month, which was the lowest since April 2000. Strengthening U.S economy will have cascading effect on developing nations like India (Indian Companies will benefit from the strong growth in US companies given its capabilities in partnering with global companies).
- OPEC and allies, including Russia, agreed to pump more oil which is nominal output rise of around 1 million barrels per day (bpd), or 1% of global supply. Unexpected increase in output from Libya and U.S had pulled down volatility in Brent crude oil prices.
Expectations of better earnings growth in Q1FY19 turning into reality has boosted investors sentiment and resulted in the Sensex index reaching record high levels of 40000. The index is trading at record highs despite the INR falling to all time lows against the USD on FII selling and government bond yields rising to multi year highs on inflation worries. The markets are focusing more on corporate earnings which have been largely unaffected by INR fall and rise in government bond yields. Q2Fy19 earnings are also expected to be on the same trajectory as Q1FY19.
The focus of the markets would shift to State Assembly elections (after Q2Fy19 results season) of Rajasthan and Madhya Pradesh in the month of December 2018 and their outcome would set the trend for the Lok Sabha elections in the year 2019.
The prospects of continued higher corporate earnings, improving GDP growth and rural income levels is expected to drive the rally beyond 40k levels for the Sensex in the near future. The Sensex and the Nifty are up by 14% and 11% respectively year to date and continue to trend upwards. The Sensex has almost reached 40,000 levels in the first half of the FY 2018-19.
Risks Going Ahead
The risks going ahead are as follows:
1. Global inflation rising faster than expected leading to central banks tightening policy. The Global central banks have already raised interest rates to some extent and continue to maintain a view that would increase rates further depending on the growth and inflationary trends.
2. India’s Monetary Policy Committee has raised the benchmark interest rate by 50 basis points in the year 2018 with the latest hike in the month of August 2018 and the Committee has retained a ‘Neutral’ monetary policy stance.
3. Trade wars are making equity markets volatile as export dependent economies would face the effect of slowdown in the corporate earnings growth due to imposed constraints.
4. The State Assembly election results would set the trend for the Sensex and the Nifty till the Lok Sabha elections in the month of May 2019. Any clear majority by a party would keep the upward trend intact for Sensex and Nifty but any fractured mandate would pave the way for a steeper correction.
We had put out a presentation of Sensex at 40k in 2019 for our subscribers. Click here for our Sensex 40k ppt.
Click here to read our economic data analysis.