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  • V K Vijayakumar

    Chief Investment Strategist, Geojit Financial Services
    He is known for his articles on capital markets, wealth management, and Indian and global economy. He has presented many papers and delivered many lectures on the capital market in national and international seminars. He has authored four books on economics, presented eight papers in international seminars and 65 papers in national seminars.

Will VUCA come in the way of making money in stocks in 2019?

Currency markets can turn out to be almost as volatile as the stock market.

ET CONTRIBUTORS|
Dec 18, 2018, 01.23 PM IST
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In 2017, globally, stock markets were unusually stable. 2018 proved to be very volatile.
We are living in a VUCA world. Volatility, uncertainty, complexity and ambiguity have been hallmarks of stock markets all the time; but now, the economy, business and even politics have been gripped by the VUCA phenomenon in an unprecedented manner.

In this VUCA world, where oil is more a financial asset than a commodity, crude prices can crash by 30 per cent in six weeks throwing monetary policy management into confusion. Hawkish policy stance can turn dovish within two months.

Currency markets can turn out to be almost as volatile as the stock market. An invincible leader and political party suddenly appear vulnerable and a languishing party, rises phoenix like, to resurgence. In this VUCA world, making predictions would be a hazardous exercise. Nevertheless, some trends discerned from market signals may prove to be profitable.

Economy is yet to gather momentum
FY 19 Q1 GDP growth at 8.2 per cent indicated that the economy has overcome the twin shocks of demonetisation and GST implementation and is set for resumption of robust growth. But the Q2 growth rate at 7.1 per cent reflects weakness in the economy and raises doubts about economic recovery. Achieving the 7.4 per cent growth target for FY19 would be quite a challenge this year. Decelerating growth rate will also impact the tax revenue, particularly GST, which, in turn, will render achieving the fiscal deficit target of 3.3 per cent extremely challenging.

Monetary stance will turn accommodative
The crash in crude and soft food prices have brought inflation well below the RBI’s comfort zone. The central bank expects H2 FY19 inflation to range between 2.7 to 3.2 per cent. With CPI inflation declining to 2.33 per cent in November and Repo at 6.5 per cent, the real interest rate is way too high. Therefore, the central bank, particularly with its new chief at the helm, is likely to move to neutral stance in the February policy and can even turn accommodative if growth continues to be weak. This is positive for markets.

Growth scare is a headwind, but it will put a lid on crude There is a near consensus now that global growth will weaken in 2019. The current economic expansion in US, which began at the trough in June 2009, is the second longest in history and is likely to turn out to be the longest if the expansion continues beyond June 2019.

US may not slip into a recession soon; but a slowdown is almost imminent. The inverted yield curve in US indicates imminent slowdown in US economy. This is bad news for global growth and is a headwind for India too. But the US slowdown along with decelerating Chinese economy and increasing shale supplies from the US will put a lid on crude price. This is advantage India.

FPI flow will be robust
A major scare for the EMs is a hawkish Fed. A strong dollar and weakening EM currencies led to FPI outflows from EMs for most part of 2018. But crude crash and currency appreciation turned the tide in November. The sharp dip in US 10-year yield – from the peak of 3.26 per cent in October to around 2.86 per cent by 10th December have stemmed capital outflows from EMs. Decelerating US economy and dovish Fed will accelerate FPI flows into EMs like India in 2019. EMs are likely to out-perform DMs in 2019. This augurs well for the market.

Earnings growth to spurt in FY 20
Projections of earnings growth have been consistently proved wrong during the last four years. The huge losses of PSU banks, the miserable performance of telecom and aviation and the woes of the metal segment contributed to this lacklustre performance.

Excess capacity in manufacturing constrained private investment. Now, there is some light at the end of the tunnel. The huge losses of the PSU Banks are likely to turn to profits for the FY 2019-20 making a big difference to profit growth and Nifty earnings growth in FY20.

Capacity utilization in manufacturing has improved and this can lead to pick up in private capex. The Q2 results of capital goods majors like L&T, Siemens, ABB and Cummins indicate smart pick up in order inflows indicating revival of capex. All these point to a smart pick up in earnings growth in FY20.

Profit from volatility
In 2017, globally, stock markets were unusually stable. 2018 proved to be very volatile. Going forward, this volatility is likely to continue, even aggravate, given the unclear political landscape in India and the looming threat of trade war between US and China. The bright prospects for earnings growth in FY20 have made valuations fair.

Further dips in the market, triggered by internal or external factors referred to earlier, will make valuations attractive. Investors can profit from this volatility.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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