Interesting but Tough Year Ahead

The calendar year 2017 has ended on a positive note and the benchmark indices recorded spectacular gains. BSESENSEX gained 7,430 points or 27.91% to close at 34,056.83 points, while NIFTY gained 2,345.70 points or 28.66% to close at 10,530.70 points. The top sectoral gainer was BSEREALTY up 106.51% followed by BSECONSUMER DURABLE at 101.92%. There were no losers during the year, but the one to gain the least was BSEHEALTHCARE up a mere 0.49%.

I do not remember these kinds of gains in the benchmark indices for a long time. Probably 2007 had a stellar performance followed by a disaster in 2008 post the Lehman Brothers crisis. While this performance would raise expectations for a better performance in 2018, because the economy is likely to do better, is quite the contrary. Market has already rallied on expected earnings growth and fallen short on them. This year could be one where markets consolidate or better still correct in the first half and then catch up in the second half. Of course, it also means that returns would be nowhere last like year and returns expectation would have to moderate.

The year was great for fundraising as well. The government raised about Rs 52,600 crs in the first nine months. The number of primary issues and the amount raised during the year are at record highs. Retail participation has never been so good with the public issue of Cochin Shipyard receiving just under 21 lakh applications. Less than a couple of years ago this figure was just about 6 lakh applications. HNI response has multiplied manifold and one sees that the funding pool which was about Rs 20-25000 crs, is now about Rs 60,000 crs. It is not new to find HNI portion of IPO’s being subscribed 300-400 times and HNI’s still making money. To add fuel to the fire even SME IPO’s are being subscribed in a big way with funding for these issues now being done by NBFC’s. Liquidity in the markets is huge and with bumper returns in 2017, investors are lapping up everything on offer. While this has its advantages, there are disadvantages as well where quality takes a beating and valuations get further stretched.

The pipeline of IPO’s is even stronger than 2017 and there are quality businesses and companies waiting to tap the markets. Some issues from the PSU stable are also on the anvil which would create waves in the market. Prominent among them would be the issues from the Railways which include IRCTC and IRFC. There are many issues which would be from businesses which are unique and do not have listed players yet. Valuations would always be a concern and clearly till they are reasonable. The response would be excellent, beyond which heaven help.

The budget would focus on creation of infrastructure and sops to the man on the street considering that this would be the last full budget before the April-May 2019 general elections. Sops maybe good for the ruling party, but not necessarily good for stock markets. Markets are also wary about some measures being introduced on long term capital gains tax and something on buyback of shares which appear to be getting misused.

While the going is likely to get tougher, the men will be separated from the boys. In a tough environment one needs to do some amount of homework and choose the biggies. I believe it will be a stock picker’s delight and judicious deployment of funds will see disproportionate returns.

Wishing all my readers a great and successful 2018.

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