Corporate Earnings May Come As Breather In The Near Term

The year 2017 has been a cheerful year for the Indian stock markets, despite major upstream events trying to restrain investors. Considering the long-term benefits of the tax reform (GST), realty regulatory framework (RERA), regulatory framework for NPAs of banks, digitisation and 'Smart City' initiatives, the smart investors kept pouring in throughout the year. Rather, the Indian markets outpaced all the emerging markets and also the developed peers like the US and Japan, where the benchmark indices soared as much as 28% during the year. Mid-caps have played a major role during the year, posting more than 45% returns. Major global bourses have been trailing the Indian markets. During the tenure, the FIIs had more than doubled their net investments in Indian equities, but their interest started declining since April 2017. Apart from the saviour LIC, this time it was the involvement of domestic MFs, specifically via SIPs that kept markets buoyant throughout. The asset base of MFs shot up by more than Rs 22 lakh crore in 2017 on strong inclination of retail investors towards SIPs, which are considered safe havens and assets that provide better returns than bank FDs. Still, our country’s ROE remains better than most other emerging markets and trades at 14.9% 12-month forward ROE, which stands lower to its long-term average. Markets look optimistic in 2018 too, but the pace will be slower owing to the premium valuations. The corporate earnings for the second half of FY18 would drive the markets in either direction. The Q3 earnings have kicked off and the frontline stocks' earnings would start off in the second week of January. The Union Budget 2018-19 would be announced in the midst of the earnings. Indians are still hesitant to enter equities with number of active participants being much lower than the number of demat accounts in the country. Moreover, the introduction of long term capital gains tax might spook investor sentiments. The last full budget under the Modi government before the elections is expected to be pro-poor rather than being pro-investor as a prelude to the 2019 elections. This post GST roll-out budget might focus more on the direct taxes and deduction in corporate taxes and most likely not have any proposals for other indirect taxes. The government’s higher focus on the implementation of the assured reforms and initiatives would drive markets to new highs in 2018. Coming to the near-term picture, the participation of investors looks lethargic at the peak levels in the Indian markets for now. The year 2018 is yet to be welcomed with arms wide open or at least a correction following a huge profit-booking so as to enter at discounts. What markets require is the liquidity which has so far been maintained by the retail investors. However, on the global front, the capital flight due to further interest rate hikes by the US, consistently rising crude oil prices, no rate cut by the RBI amid inflationary pressures might dampen the sentiments in the near term. The upcoming budget and corporate earnings rally may come as breather.