Given below is a quick rewind of 2018, and our expectations from 2019.

 Markets that ran twice as fast only to stay in the same place

·         Nifty 50 Index- a 3.2% movement over the year, but a decline of ~15% from fresh life-time high in August, before recovering in Nov-Dec 2018.

·         10Y GSec- a 0.1% movement in yield over the year, after jumping higher than 1% over the opening value by Sep 2018, and a decline of 0.9% from there (remember that bond prices rise if yields decrease and vice-versa).

·         The Dow Jones Industrial Average (DJIA), the US benchmark index- closed ~6% lower than the opening, but saw a decline of ~19% from its peak in Sep 2018.

 Will these benchmarks carry forward the revival in performance towards the end of the year into 2019?

 Markets where there was pronounced movement

·         The INR (Indian Rupee) after slipping 17% against the USD, recovered towards end-2018 to close 9% down

·         The NSE Midcap 100 Index, which slipped ~26% from its January peak in October, and managed to recover 12% from there to close 15% down from its opening value.

·         Brent Oil, which jumped 27% from its opening by October, and then flip-flopped to close ~20% below its opening.

·         The US 10-year Government Bond, after climbing to 3.2%- its highest after 2009- collapsing again to end around 2.7% due to the change in the Fed’s commentary (see “The more things change”)

·         Metals, losing between 18% to 26% in price over 2018.

Are these markets now great value buys? Or value traps?

 The more things change

·         2018 saw a rapid change from a benign outlook on global growth to pessimism on growth prospects

·         A rapid reversal of opinion from a ‘tight’ oil market to an ‘oversupplied’ one

·         The US Federal Reserve suddenly changed its tune from the current benchmark rate being way below the neutral to being near the neutral, as markets fell and the growth prospects looked more uncertain.

·         The RBI, after insisting that liquidity was adequate, resorted to open market operations (OMO) to infuse liquidity towards the end of 2018- and went through a change of Governor, in the bargain.

·         Farm loan waivers are back in vogue after recent state elections, though their quantum and impact on interest rates and inflation remains unquantifiable for now.

 The more they remain the same

·         India still cannot decide if its new GDP series is properly measuring economic growth, adding to uncertainty on growth debates.

·         GST collections continue to under-shoot budget targets, sustaining worries on the fiscal deficit.

·         NPA provisioning by banks, especially public sector banks continued.

·         The INR is stubbornly fixed to the 70-mark against the USD.

·         Job growth, and ‘optimism on the street’ remain elusive

·         The Nifty and Sensex valuations (PEs) remain elevated, even after a volatile 2018

 Our hits

·         The decision to take out 20-25% from large/multicap funds and 40% from mid/smallcap funds in Feb 2018

·         The decision to focus on high-credit quality funds, and not chasing either higher yields (by focusing on credit-risk funds) or positioning for rate declines (through dynamic bond funds).

 Our Misses

·         Not using the decline in yields after the RBI monetary policy committee’s Apr 2018 meeting to shift from dynamic to medium term bond funds.

·         Not aggressively reducing exposure in credit risk funds invested in the past

 Sticking our necks out- A 2019 forecast

·         The USD-INR trend depends on oil prices and government finances, two notoriously unpredictable areas. However, based on fundamentals, our forecast is for a stable INR, trading in a narrow range.

·         On debt markets, we do not expect the decline in G-Sec yields over Nov-Dec 2018 to intensify, given headwinds on the fiscal and policy (election year!) front. GSec yields may trade in a narrow range, but AAA bond yields may drop as the current 1% spread of 5Y AAA over 10Y GSec is far higher than normal.

·         Even as metal prices declined in USD terms, the INR depreciation has meant that raw material margins have not eased too much. Unless demand accelerates, profit growth may remain muted.

·         Barring a sustained capex revival, profit growth may not justify valuations, and stock markets may face significant headwinds sometime in 2019.

·         In Global markets, China and the US will continue to be the great hopes for growth; however, uncertainty on economic relations between the two, a weak USD in 2019 (Fed not hiking aggressively) and fading effects of the tax cuts may ensure that both countries do not surprise with high growth.

 Walking the Talk- Proposed Actions

·         Partly exit equity funds if the trend over Nov-Dec 2018 strengthens in the first half of 2019, and wait patiently for valuations to normalize before re-deploying.

·         We continue to recommend AAA-focused, medium term debt funds with reasonable net yields, which may benefit from a compression in the GSec-AAA spread.

 What may change- Areas we will monitor

·         Revival in the capex cycle strengthening

·         Sudden changes in fiscal situation post-elections

·         Sharp moves in indices around elections to see if they become reasonably valued on a transient basis

 Finally, best wishes for 2019 from all of us.