The short-term risk to the domestic equity markets emanates from the forthcoming election, rising global oil prices and possible failure of monsoon. While the global crude oil price rose 40% from the December 2018 low, a research agency has predicted a marginal failure of monsoon at 93% of the long period average this year.
However, some amount of political instability would be absorbed by the domestic equity market without falling badly as there are no major economic reform measures pending. Further, India remains as the fastest growing economy, with projected growth of 7.2% in FY2019 and 7.3% in 2020 on strengthening consumption. India's banking credit continues to grow in quite double-digits for the last several months continuously. India's exports are expected to hit an all-time high of $330 billion for FY2019. During the April-February period of FY2019, the overall exports (goods and services) grew by 8.7% (YoY) –this is quite healthy considering the WTO's expectation of 2.6% growth in global trade in 2019.
The risk from the global oil price is likely to be limited as faltering global economy may start eating into demand for oil as early as this year, pushing prices lower. Fitch Ratings, in fact, sees 2019 oil prices falling to $62.50 in 2020 and $57.50 by 2022.
India's agricultural and allied sector accounts for just about 18% of GDP. Within this share, core agricultural sector (excluding allied industries like fisheries, etc), accounts for just around 15% of overall GDP. So, the direct impact of the marginal failure of monsoon on overall economic growth would be limited.
Still, it is better for the investors to position the equity portfolios for three possible risks highlighted above. While modest risk-taking investors could make at least 30% exposure, highly conservative investors could opt for as high as 70% of the portfolio for the large-cap stocks. Already the performance of area sown under both kharif and rabi crops was quite poor. While kharif crop production is estimated to be just 1% higher than the previous year, the rabi output is expected to contract by 3% over the previous year. Hence, it is better to go under-weight on agri-related (fertilizer, crop protection, etc) stocks.
Two themes - old private sector banks (OPSB) and mid-sized IT companies- emerging much stronger in the markets. Mindtree and NIIT Technologies in the mid-sized IT segment and Lakshmi Vilas Bank (LVB) in the OPSB segments became targets of acquisitions. In both segments, the valuations have got further strengthened – while these IT companies have got a valuation of 2 to 2.8 times Enterprise Value to annual revenues, LVB has got more than 8 times price (price based on swap ratio) to adjusted book value. This acquisition theme is likely to continue in both mid-size IT and OPSB segments and therefore, banking on these two themes may minimize the risk to the overall equity portfolio by creating significant wealth.
The writer is founder and managing director, Equinomics Research and Advisory