Your money in 2018: Outlook for different asset classes in New Year
, ET Bureau|
Jan 01, 2018, 08.40 AM IST
Mumbai: 2017 was undoubtedly the year of equities. The benchmark Sensex shot up 28 per cent, while the broader market did even better. Small investors, who took to mutual funds in a big way in 2017, were amply rewarded as equity funds created wealth for everyone. It is heartening to note that small investors are turning mature and taking the systematic route to wealth creation through equities. Monthly SIP inflows into equity funds shot up in 2017, rising 50 per cent from Rs 4,095 crore in January to cross the Rs 6,000 crore mark by the end of the year.
At the same time, other asset classes remained decidedly in the doldrums during the year. Real estate was struck, first by demonetisation, then by the establishment of the Real Estate Regulation Authority and the implementation of the Benami Property Act and finally by the rollout of the GST. Except for a few pockets in the country, property prices either remained flat or saw a marginal rise of 2-3 per cent. In many markets, including Delhi NCR, prices actually came down. The debt market was also lacklustre in 2017. As the RBI changed its stance on interest rates, bond yields started rising again. The benchmark 10-year government bond yield ended the year at 7.33 per cent, up more than 72 basis points in 2017. As bond yields fell, debt funds gave out very poor returns. The worst performers were long-term gilt funds, which closed the year with an average return of 2.5 per cent. The surge in stock prices and rising bond yields are dichotomous. As one analyst put it, "the optimism of the stock market and the pessimism of the debt markets are not talking to each other".
EQUITIES
After great returns in 2017, it is time for equity investors to moderate their expectations. "2017 was a good pitch to score, but 2018 will be bowling pitch and will be difficult to score. So investors need be extremely selective while picking stocks," says Nilesh Shah, managing director, Kotak Mahindra Mutual Fund. "We expect Indian markets to generate only around 10 per cent return in 2018," says Tirthankar Patnaik, chief strategist and head of research, India, Mizuho Bank.
This is because of several structural changes during 2017. Interest rates (measured by the 10-year bond yield) have moved up around 90 basis points in the past five months. High interest costs pull down the profits of companies. Also, most macroeconomic improvements witnessed in the past few years were because of the fall in crude oil prices. But global crude oil prices have moved up by around 50 per cent in the last six months. Besides, Indian companies have witnessed low earnings growth for the past several years and 2017-18 won't be different. The recent rally factors in the expected earnings improvement in 2018-19 and the positive impact of the GST.
Though the market is at an all-time high level, a correction will not round the corner. "Since the liquidity is high, reducing equity exposure will be a blunder. Stay invested, but also take some protective measures like buying long-dated put options," says Feroze Azeez, deputy CEO, Anand Rathi Wealth Services.
If you are a contrarian investor, some beaten down sectors, such as IT and PSU banks, can offer good returns. "The IT sector may generate decent returns," says Patnaik.
FIXED INCOME
The slump in the debt market was rather unexpected. From a low of around 6.4 per cent in July, the 10-year bond yield has risen to around 7.3 per cent now. Inflation worries and a jump in crude prices have led to fears of an interest rate hike. Though the RBI has maintained a neutral stance, the market has already priced in a rate hike. "The current yield curve is discounting a 30-40 bps rate hike by the RBI. Since RBI is not expected to hike rates, there can be a pull back in yield due to technical reasons," says Dwijendra Srivastava, CIO, Debt, Sundaram Mutual Fund. "We are expecting an extended pause (throughout 2018) by RBI because weak growth will also be weighing on its mind. Since the bond market has already discounted possible negatives, the 10-year yield should not go beyond 7.4-7.5 per cent levels. FII interest should come back at these levels," Lakshmi Iyer, head of fixed income, Kotak Mutual Fund, agrees.
Rising yields mean that fixed deposit rates could remain stable in 2018. However, the government has cut interest rates on small savings schemes by 20 bps for most products. The PPF and NSCs will now give only 7.6 per cent while the Sukanya Samriddhi Yojana will offer 8.1 per cent. Mercifully, the Senior Citizens' Saving Scheme has been spared the rate cut and will continue to give 8.3 per cent. Given the rate gap between the SCSS and bank FDs, the scheme should be the first choice for retirees.
REAL ESTATE
The year 2017 was bad for real estate, and the new year will not be any different. "Residential real estate prices were under pressure across India, especially in the high-priced markets such as Mumbai, Delhi NCR and Bangalore," says Samantak Das, chief economist & national director - research, Knight Frank India. In residential real estate, there was a significant slowdown in new launches due to RERA. "In these difficult market conditions, only developers with a good track record were able to sell more units," says Amit Oberoi, national director, valuation & advisory and research, Colliers India.
The oversupply of residential real estate in most markets mean that prices may not go up in 2018. "Consumer confidence is slowly coming back, first to affordable housing segment, after Maharashtra implemented RERA in letter and spirit. Buyer sentiment will pick up once other states also do it. So we can see some revival in the second half of 2018," says Das.
"Prices may remain stable because the under construction supply has got reduced. The completed inventory may get exhausted in 2-3 years," says Kunal Moktan, co-founder, PropertyShare.in.
GOLD
Gold remained relatively stable in 2017 despite some rate increases by US Federal Reserve. Experts believe the trend may continue in 2018 as well, because the US dollar is not expected to move up higher this year. "Despite some rate increases, US dollar is expected to remain soft because of several other factors. First, the new US Fed chairman is dovish. Second, Donald Trump will try to keep the dollar soft to protect US trade," says Kishore Narne, associate director, Motilal Oswal Commodities Broker. Others expect some respite for gold in 2018 because it has underperformed other asset classes in the past 3-4 years. "Gold could go up, but don't expect euphoric returns," says Iyer of Kotak Mutual Fund. "We are marginally positive on gold now and expect it to reach $1,380-1,400 by end of 2018," says Narne. This translates to a modest return of around 8 per cent.
Even so, experts don't see much downside to gold in 2018. "Gold has good support at around $1,240 and in the worst case scenario, it may not go below $1,180," says Narne.
At the same time, other asset classes remained decidedly in the doldrums during the year. Real estate was struck, first by demonetisation, then by the establishment of the Real Estate Regulation Authority and the implementation of the Benami Property Act and finally by the rollout of the GST. Except for a few pockets in the country, property prices either remained flat or saw a marginal rise of 2-3 per cent. In many markets, including Delhi NCR, prices actually came down. The debt market was also lacklustre in 2017. As the RBI changed its stance on interest rates, bond yields started rising again. The benchmark 10-year government bond yield ended the year at 7.33 per cent, up more than 72 basis points in 2017. As bond yields fell, debt funds gave out very poor returns. The worst performers were long-term gilt funds, which closed the year with an average return of 2.5 per cent. The surge in stock prices and rising bond yields are dichotomous. As one analyst put it, "the optimism of the stock market and the pessimism of the debt markets are not talking to each other".
EQUITIES
After great returns in 2017, it is time for equity investors to moderate their expectations. "2017 was a good pitch to score, but 2018 will be bowling pitch and will be difficult to score. So investors need be extremely selective while picking stocks," says Nilesh Shah, managing director, Kotak Mahindra Mutual Fund. "We expect Indian markets to generate only around 10 per cent return in 2018," says Tirthankar Patnaik, chief strategist and head of research, India, Mizuho Bank.
This is because of several structural changes during 2017. Interest rates (measured by the 10-year bond yield) have moved up around 90 basis points in the past five months. High interest costs pull down the profits of companies. Also, most macroeconomic improvements witnessed in the past few years were because of the fall in crude oil prices. But global crude oil prices have moved up by around 50 per cent in the last six months. Besides, Indian companies have witnessed low earnings growth for the past several years and 2017-18 won't be different. The recent rally factors in the expected earnings improvement in 2018-19 and the positive impact of the GST.
Though the market is at an all-time high level, a correction will not round the corner. "Since the liquidity is high, reducing equity exposure will be a blunder. Stay invested, but also take some protective measures like buying long-dated put options," says Feroze Azeez, deputy CEO, Anand Rathi Wealth Services.
If you are a contrarian investor, some beaten down sectors, such as IT and PSU banks, can offer good returns. "The IT sector may generate decent returns," says Patnaik.
FIXED INCOME
The slump in the debt market was rather unexpected. From a low of around 6.4 per cent in July, the 10-year bond yield has risen to around 7.3 per cent now. Inflation worries and a jump in crude prices have led to fears of an interest rate hike. Though the RBI has maintained a neutral stance, the market has already priced in a rate hike. "The current yield curve is discounting a 30-40 bps rate hike by the RBI. Since RBI is not expected to hike rates, there can be a pull back in yield due to technical reasons," says Dwijendra Srivastava, CIO, Debt, Sundaram Mutual Fund. "We are expecting an extended pause (throughout 2018) by RBI because weak growth will also be weighing on its mind. Since the bond market has already discounted possible negatives, the 10-year yield should not go beyond 7.4-7.5 per cent levels. FII interest should come back at these levels," Lakshmi Iyer, head of fixed income, Kotak Mutual Fund, agrees.
Rising yields mean that fixed deposit rates could remain stable in 2018. However, the government has cut interest rates on small savings schemes by 20 bps for most products. The PPF and NSCs will now give only 7.6 per cent while the Sukanya Samriddhi Yojana will offer 8.1 per cent. Mercifully, the Senior Citizens' Saving Scheme has been spared the rate cut and will continue to give 8.3 per cent. Given the rate gap between the SCSS and bank FDs, the scheme should be the first choice for retirees.
REAL ESTATE
The year 2017 was bad for real estate, and the new year will not be any different. "Residential real estate prices were under pressure across India, especially in the high-priced markets such as Mumbai, Delhi NCR and Bangalore," says Samantak Das, chief economist & national director - research, Knight Frank India. In residential real estate, there was a significant slowdown in new launches due to RERA. "In these difficult market conditions, only developers with a good track record were able to sell more units," says Amit Oberoi, national director, valuation & advisory and research, Colliers India.
The oversupply of residential real estate in most markets mean that prices may not go up in 2018. "Consumer confidence is slowly coming back, first to affordable housing segment, after Maharashtra implemented RERA in letter and spirit. Buyer sentiment will pick up once other states also do it. So we can see some revival in the second half of 2018," says Das.
"Prices may remain stable because the under construction supply has got reduced. The completed inventory may get exhausted in 2-3 years," says Kunal Moktan, co-founder, PropertyShare.in.
GOLD
Gold remained relatively stable in 2017 despite some rate increases by US Federal Reserve. Experts believe the trend may continue in 2018 as well, because the US dollar is not expected to move up higher this year. "Despite some rate increases, US dollar is expected to remain soft because of several other factors. First, the new US Fed chairman is dovish. Second, Donald Trump will try to keep the dollar soft to protect US trade," says Kishore Narne, associate director, Motilal Oswal Commodities Broker. Others expect some respite for gold in 2018 because it has underperformed other asset classes in the past 3-4 years. "Gold could go up, but don't expect euphoric returns," says Iyer of Kotak Mutual Fund. "We are marginally positive on gold now and expect it to reach $1,380-1,400 by end of 2018," says Narne. This translates to a modest return of around 8 per cent.
Even so, experts don't see much downside to gold in 2018. "Gold has good support at around $1,240 and in the worst case scenario, it may not go below $1,180," says Narne.
