Stock market investors have had a good year. The benchmark Sensex has crossed 34,000, gaining around 28%. Investors shrugged off changes such as the currency note ban in November 2016 and the July implementation of the Goods and Services Tax (GST) which disrupted businesses. A sluggish economy, disappointing investment in capacity building and lacklustre corporate earnings have also not impeded the steady rise in stock prices. Two straight years of good rains and a pay raise for government staff has fuelled hopes of higher domestic consumption in 2018 and kept the markets going. Bumper stock purchases by local mutual funds owing to increasing financialisation of savings has also helped. Domestic institutional investors invested a record Rs. 91,000 crore in Indian stocks this year betting that the economy will see a cyclical recovery the next fiscal year.
Yet, as 2018 approaches, investors should brace for increasing volatility. For one, stock prices are appearing that much more expensive when compared against earnings growth which has not kept pace. While analysts have predicted an earnings recovery over the next year, it should be noted that profit margins could get squeezed as companies face rising input cost pressures.
Crude oil prices have risen about one-fifth this year and not only pose an earnings risk for companies but also add to India’s macro worries. Rising oil prices may prompt the government to abandon fiscal prudence at a time when GST collections have been lower than expected. A fiscal slippage could fuel inflation and lead to higher borrowing costs. The chances of a fiscal slippage are anyway high as the government might choose to go populist with as many as five state polls lined up next year and the February Union Budget being the last one for the central government before general elections in 2019. On top of this, there is the risk that foreign fund flows will dry up as global central banks turn off the easy money spigot and attempt to shrink their bloated balance sheets.
These are downside risks. If domestic flows continue to compensate for falling foreign flows, investment demand picks up as forecast by some analysts and multilateral agencies, and economic growth surprises on the upside, that could keep the markets running.
{{/usCountry}}These are downside risks. If domestic flows continue to compensate for falling foreign flows, investment demand picks up as forecast by some analysts and multilateral agencies, and economic growth surprises on the upside, that could keep the markets running.
{{/usCountry}}All said, the buzzword for markets in 2018 is volatility