Private Banks, construction materials, specialty chemicals, and consumer food sectors are expected to outperform led by healthy demand and earnings growth, says Rajesh Cheruvu of WGC Wealth
The year 2019 is likely to be a year of transformation as several cross-nation and cross-industry wide forces take shape to alter the course of "business-as-usual".
Globally, the era of trade wars has taken a centre-stage. There has been a marked shift from decades of globalisation that was infused into the world business culture.
Companies around the world are working around the economic iron curtain drawn by the US President Donald Trump. Several of the G-20 entities post their 2018 year-end talks would be heading into elections and/or reforms in 2019.
The UK would be leaving the EU on March 29, 2019 after 46 years and two months before the EU Parliament voting. EU itself would be grappling with its own extremist right-wing proponents.
Brexit along with the US-China trade tensions should and has made companies re-organise their geographical blueprints. Case in point: BMW, having significant China exposure, has relocated its US plant to China to avoid China’s import tariffs on US goods.
China, on the other hand, is battling its own demons in the form of debt overload and an economic model transformation from investment driven to consumption driven.
In India, the general elections hold a plethora of possibilities that stokes the wheels of uncertainty even more.
Be it fintech in banking, OTT in entertainment, EVs in automotives, data security in cybertechnology, socially responsible ESG investing in investment management, rise of niche investors shaping their businesses such as women empowered workspaces or next-gen family business entrepreneurs or breakthroughs in healthcare—change is the theem for the year ahead.
In 2019, subdued input costs combined with rising capacity utilisations may help companies gain from improved operating leverage and profitability. This could strengthen the earnings outlook and ease valuation concerns at the aggregate level.
Currently, NSE benchmark equity index is trading at 17.7 times to 1-Year forward estimated earnings with an estimated earnings growth of 19 percent between FY18-20.
Rising domestic investor participation, healthy earnings outlook, and current reasonable valuations should likely keep the momentum in domestic equities constructive in 2019.
Having said that, we can't rule out potential volatility related to political uncertainty ahead or post elections. Historically, though, looking at the past two decades of elections and market behaviours, such price volatility has had very little impact on long-term wealth creation.
The mid-cap valuation premiums over largecaps have come down in 2018 making the former attractive yet again. Private banks, construction materials, specialty chemicals, and consumer food sectors are expected to outperform led by healthy demand and earnings growth.
The author is Chief Investment Officer at VALIDUS Wealth.