2019 to be year of low volatility, low return; immediate Nifty target at 11,800: Narnolia

The year 2019 is starting with a highly pessimistic backdrop that spans asset classes and geographies. During the last few months, major equity indices have fallen 15-25 percent from their respective peaks. US equity index Nasdaq is down 24 percent, Dow Jones 19 percent.

Among major European equity indices, DAX is down 21 percent, CAC is down 17 percent. Asian major equity indices like Nikkei and KOSPI are down 21 percent each. Among commodities, crude is down 41 percent, zinc, nickel, and aluminium 30 percent. Nifty is a major outperformer comparatively as it is down by less than 10 percent from its peak.

One of the key financial market indicators, the yield curve in the US is turning flat. One of the major concern is 2-year yield is trading higher than 5-year yield. Yield curve inversion in past has been a strong indicator of recession ahead.

Disruptive political and administrative discourse along with trade conflict continues to be a major overhang. At this delicate time, ECB has announced the discontinuation of its 30 billion euros a month bond buying program after buying nearly 2.6 trillion euros worth of bonds. The concern here is that recent data suggest a sharp slowdown in Italy and Germany. In a global slowdown, Europe and its banks remain vulnerable to liquidity shock and that is the key market worry going ahead.

China’s GDP growth has consistently been revised downward. Over the last three months, China’s auto sales have seen a decline of 11 percent. Only positive here is continued real economic growth in the US.

The unemployment rate in the US remains at an all-time low while the wage growth is at a nine-year high. In this sense, the H1CY19 should see financial market gaining back some stability if the real economy continues to remain robust. And that is the key data to track closely.

Global financial markets—equity, commodities—should be entering low volatility low return phase. We had low volatility high return in 2017. 2018 was high volatility high negative return market. And now, 2019 will be low volatility low return market.

The forthcoming general election will impact market volatility but not the return. In 2018, major moves of our market were more to do with global issues like oil price volatility or stock valuations and not to do with any policy issues and this should continue in 2019.

We are past the major policy disruption period in India with demonetisation and implementation of GST. Some 25-30 bps changes in fiscal deficit estimate are not large swing events for the market at least at this point of time.

Bond yield is expected to soften below 7 percent. Earnings growth for Indian corporate in FY20 is expected to be robust 21 percent.

Immediate Nifty target for 2019 is 11,800 at 19 times FY20 EPS of 620. At cap and theme levels, we expect very similar price returns as earnings growth of various subsection of the market whether at cap level or at the theme level.