2019 outlook: Long-term growth story remains intact for India

1. What is your investment outlook for Indian equities in 2019? 
2018 has been a challenging year for Indian equities which, in line with other global emerging markets, underperformed developed markets. The weakness in Indian equities was a result of a steep rise in the oil price, India’s major import item, and concerns around tighter domestic liquidity on the back of US dollar appreciation. The uncertainty due to upcoming state and general elections also played on investor sentiment.

The above-mentioned events adversely impacted shares in the financial sector, especially the wholesale-funded institutions in the housing finance and non-banking finance space. These events also halted the uptrend in good quality stocks that were trading at expensive valuations.

Going forward, I expect the markets to remain volatile in the near term (next six months). The oil price will remain a critical factor, due to its implications for the Indian rupee and domestic liquidity. In addition, I expect that there will be a lot of noise around state-level elections in December, and general elections in the first half of 2019.

However, over the longer-term, I see no change in India’s structural growth story. We have seen different political parties, and their coalitions, forming governments in India, however there has not been any substantial deviation from the reform path undertaken when the economy was liberalized in 1991. 

On the corporate front, the picture now looks brighter, as companies have been deleveraging for the last 5-7 years and the banking system seems to have been cleaned up. 

As valuations correct to a more reasonable level, I see opportunities for bottom-up stock picking in high-quality businesses in the Indian market.

2. What do you think could most surprise investors next year? 
I think the noise around state-level elections in December and general elections in the first half of 2019 will keep markets volatile in the near term. 

However, the key risks would be if the oil price bounces back and stays above US$80 per barrel. As I mentioned, the oil price is critical for the Indian economy, due to its implications for the Indian rupee and domestic liquidity. 

The opportunity is that this market volatility could lead to bottom-up stock selection opportunities for the long term at more attractive prices.

3. How do you plan to capture the best opportunities? 
Given recent events, I have reduced some holdings in the financials sector where conviction was low. In turn, I have used market volatility to raise exposure to higher-quality names in private sector banks, which should continue to benefit from structural increases in the penetration of financial products, as they gain market share from weaker and less efficient public-sector banks. 

Among the housing finance companies too, the exposure to what we see as the best quality names has also been increased, as these are unlikely to face liquidity pressures even in the worst-case scenario. These companies look to be well-positioned to service the long-term structural demand for mortgages and win market share from weaker players.

In line with my investment philosophy, the portfolio is liquid and has a mix of large, mid and small caps stocks, which should help to reduce the risk of getting stuck in large illiquid positions.

As near-term risks are being priced in by the market, I will continue to hunt for high quality growth stocks, characterized by their higher returns on equity, free cash flows and lower debt, at more reasonable prices.


As valuations correct to a more reasonable level, I see opportunities for bottom-up stock picking in high-quality businesses in the Indian market.



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