Equity markets continued to defy logic throughout the year, posting their highest yearly gains since 2009. Like many analysts, I also failed to read the bullish undertone of the markets, especially in the last quarter of the year, post GST implementation. The Indian equity benchmarks closed the year at new highs (BSE Sensex crossed the 34000 mark whereas Nifty closed above 10500), clocking an annual growth of over 35% in US $ terms. The returns in Rupee terms were slightly muted at 28% as the INR strengthened against the US $ from a level of 68 to 63.75 by the end of the year. Overall Indian equity markets ranked among the Top 3 best performers along with Hungary & South Korea.
The spectacular rally was largely led by global factors and the continuing liquidity overhang. The perception about the rebound in the economy based on the reforms unleashed by the BJP Govt. also helped the cause of stellar performance of our markets. Yet again, fourth year running, Mid Cap and Small Cap stocks out-performed the front line indices. The sectors that led the rebound were Consumer durable and Real Estate, followed by Metals, whereas Pharma & IT proved to be the laggards. Domestic Mutual Funds contributed Rs. 1,15,000 crores to sustain the rally, their contribution outstripping the Foreign Funds flow.
With this stellar performance behind, the equity markets are poised for subdued returns in the year 2018 due to global factors:
- Liquidity tightening: With the Central Banks in the developed world led by US FED poised to raise interest rates, excess liquidity is likely to be sucked out
- The much awaited economic turn around may be delayed as emerging markets like China are likely to slow down
- The threat to global peace still looms large with North Korea & Gulf region still eluding permanent peace.
- Energy prices: The rise in energy pack could be detrimental to the growth prospects of developing nations like India, China
In addition, the Fiscal deficit target for India is unlikely to be met, the rising inflation could also be a major spoiler in the party. In such a scenario equity indices could at best give a modest single digit return for the entire 2018, they will probably struggle in the first half of the year, and a 10% correction from these levels may not be ruled out.
