Will the calendar year 2018 belong to the bull or to the bear? - Motilal Oswal
Will the calendar year 2018 belong to the bull or to the bear? - Motilal Oswal

Will the calendar year 2018 belong to the bull or to the bear?

Whenever we are up against imponderables, we tend to remember the two famous words from Alice in Wonderland, "It Depends". That would largely be the answer to the question on whether the year 2018 would belong to the bulls or the bears. At a very broad level it appears that year 2018 could belong more to the specific stocks and granular stories rather than to broad macros. Having said that, here are 4 factors that will be a key determinant of how the Indian equity markets will shape up in 2018. We could make bull market predictions and we could also make bear market predictions. Here is what will actually drive the markets during the year..

How the quarterly earnings pan out..
This could actually be the billion dollar question facing markets. In the last two quarters there have been some green shoots of recovery shown by Indian companies in their quarterly reporting. After relying for the last 2 years on better operating margins on the back of lower oil prices, the last two quarters has seen some visible improvement in top-line growth. We have also been getting some good indications in the last few days. The core sector growth for November 2017 came in at a high of 6.8% and the PMI Manufacturing (factory sales) for December 2017 came in at a 54.7. This is one of the best growth spurts in PMI Manufacturing in the last couple of years. Additionally, the auto numbers over the last 3 months have been consistently flattering. In the Q3 results and the forthcoming quarters, the focus will be on 3 broad segments for growth. Consumer goods, capital goods and global sectors will jointly determine how the quarterly results pan out. If the growth momentum can be taken to a higher plane, then we surely have a bull case for 2018.

How the Fed rates evolve during the year 2018..
The movement in Fed rates may appear to be a distant variable but that is not the case. Being the largest economy in the world, US monetary policy has implications for most global economies. Indian rate outlook is largely positioned based on how the Fed gives its outlook. With the Fed hinting at 4 possible rate hikes in 2018, there could be a base-case for other central banks to also embark on rate hikes. For RBI, this presents a unique problem. It has been cutting the rates on small savings even as bond yields are moving higher. If the US Fed opts for 4 rate hikes in 2018 then the RBI may be forced to hike rates in India too. A rate hike of 25-50 bps will be easily absorbed but anything above that will be unfavourable for Indian equity markets. Watch out for that!

How the oil prices will move globally in 2018..
In fact, the Brent Crude oil prices at around $67-68/bbl is already at a slightly uncomfortable level. This is more so for a country like India which relies on imports for nearly 80% of its daily oil needs. For the Indian balance of trade, the average monthly trade deficit of $13 billion is almost as much as the economy handle. Any movement in oil prices above $70 could seriously impair the trade deficit and it will also have a negative impact on inflation. Remember, oil has strong externalities and hence its downstream impact on prices is much larger than is apparent. Both high oil prices and high inflation are not favourable for the equity markets and it could create a slightly bearish scenario. While the global supply and demand for oil should stabilize around current levels, economics of oil has been traditionally unpredictable. That remains a major uncertainty for Indian markets.

How the global and domestic flows will play out..
Finally, what could make the difference will be the flows. Of course, we are referring to flows from domestic and global investors. Domestic flows will continue. As more and more retail investors are now getting converted to the merits of equity investing, equity funds are seeing a virtual deluge of money. Most of the flows are coming through SIPs. With the government cutting rates on PPF and on RBI bonds, this trend is likely to get more accentuated in the coming months. Domestic flows will remain buoyant and that should provide support for the markets. But the real question is how will FII flows turn out in 2018? Bear or bull market 2018 will eventually depend on the colour of FII flows and that could be a big question mark. US rates are likely to move higher and FIIs are already concerned about fair valuations in India. Unless there are positive surprises from the quarterly earnings numbers, FII flows in 2018 could remain tepid.
Coming to stock market predictions 2018, it could belong neither to the bulls nor to the bears. Actually, year 2018 will belong to the active investor. More so, because the passive investors are not likely to run away with lip-smacking returns like in 2017. That may be the big take-away for 2018!

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