BackAfter blockbuster 2017, markets brace for firm, but relatively lower returns next year
Expectations of continued strong inflows from DIIs are likely to drive markets higher even as valuations seem to already discount a recovery in earnings
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Mumbai: After a blockbuster year for equities in 2017, market participants are looking at firm, but relatively lower returns in 2018, betting on an economic recovery and a rebound in corporate earnings.
The Sensex rose 27.91% in 2017 to end at 34,056.83 points.
These are its best gains since 2014, with domestic institutional investors (DIIs) buying a record Rs90,834.80 crore worth of Indian shares during the year. Foreign institutional investors (FIIs) bought Indian equities worth $7.94 billion in the same period.
The liquidity deluge also drove mid-cap and small-cap indices to record highs; they gained 48.13% and 59.64% during the year.
Expectations of continued strong inflows from DIIs are likely to drive markets higher even as valuations seem to already discount a recovery in earnings.
In dollar terms, the Sensex logged its best gains in eight years, thanks to a stronger rupee. The 36.02% rally by the Sensex in dollar terms in 2017 makes it the best performing index after Korea’s Kospi index, which rose 37.55%.
“…equities are expected to still give healthy, double-digit returns in 2018 on account of healthy revival in earnings growth, coupled with continued inflows into equities," Sharekhan by BNP Paribas said in a 26 December report.
“Though foreign inflows tend to be unpredictable and erratic at times, domestic inflows are likely to remain healthy due to lack of better investment opportunities," Sharekhan analysts added.
Among other asset classes, gold prices rose over 12% in 2017, its highest yearly jump in seven years, while Brent crude rates soared around 17% in the same period.
Dollar weakness and intermittent flare-ups in geopolitical tensions led to the rally in gold as investors parked some money in safe havens.
“The dollar, however, slumped in 2017 as US President Donald Trump’s reforms took considerable time and other central banks provided hints about scaling back their stimulus. This helped gold outperform despite the US Federal Reserve hiking rates thrice in 2017," said Kishore Narne, head-commodity and currency, Motilal Oswal Commodities.
Narne expects gold to touch $1,380-1,400 in the year ahead. In the domestic markets, Rs28,200-28,500 is expected to remain a strong floor for gold prices, he added.
Madhavi Mehta, an analyst at Kotak Commodity Services, however, said gold prices may be range-bound in 2018, with no major triggers in sight.
Meanwhile, the factors behind a jump in oil prices are a high level of compliance by Organization of the Petroleum Exporting Countries (Opec) on output cuts, continuous withdrawal of oil inventories in the US and falling Organisation for Economic Cooperation and Development (OECD) oil inventories.
In December, oil prices hit a 30-month high at $67.02 per barrel. Uncertainty with regard to the policies of the new US government, lower growth rate in China are major headwinds for crude in 2018.
In the currency markets, 2017 was the best year for the rupee in at least 10 years while the dollar index—a basket of currencies of the major trading partners of the US—saw its sharpest decline in a decade.
This year, the rupee rose over 6% and the dollar index slipped more than 9% in the same period.
The weakness in the US dollar in the first three quarters of 2017, as well as the resurgence in FII inflows into Indian debt, and to a smaller extent into equity, contributed to the appreciation in the rupee, said Aditi Nayar, principal economist, ICRA Ltd.
ICRA expects the rupee to trade in a range of 63-67 per dollar in 2018.
“There is limited headroom to increase FII investment in Indian debt. The pace of recovery of corporate earnings and the macroeconomic outlook would drive the magnitude of FII inflows into Indian equity in 2018. Additionally, the trends related to FDI inflows, and European Central Bank (ECB) and non-resident Indian (NRI) deposits relative to the size of the current account deficit would affect sentiment toward the rupee. Commodity prices and the outlook for inflation and the fiscal deficit would also influence sentiment," Nayar added.
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