2017 was an excellent year for equity investors the world over. Globally, equities were up by 25 per cent and emerging markets were up by 38 per cent in dollar terms. India too did very well with the Nifty posting 28 per cent returns. Nifty Midcap and Nifty Smallcap indices appreciated by around 48 and 55 per cent respectively. These are fabulous returns indeed! A unique feature of the global rally in 2017 has been the surprising absence of major volatility. The synchronized global economic growth, good earnings growth and low interest rates ensured sustained buying in the markets.
OUTLOOK FOR 2018: GLOBAL GROWTH TO REMAIN ROBUST
Outlook for the global economy appears good for 2018. The World Bank has projected global growth improving to 3.1 per cent in 2018 from 3 per cent touched in 2017. The 2017 growth rate of 3 per cent was a 10-year high, with the exception of the rebound in 2010 from the contraction in 2009.
A positive factor favouring the bulls is that there are no signs of financial instability in any major economies. Even though the Chinese debt issue remains a concern, it is far more subdued than what it was a year ago.
In the US, the growth was robust at 2.3 per cent in 2017 and unemployment was at very low levels. In 2018, the US is likely to post a growth rate of 2.5 per cent with near full employment. European Union grew by 2.4 per cent in 2017 powered by good growth in Germany, France and the UK. China slowed down to 6.8 per cent, but since the country now is a $12-trillion giant it added hugely to global growth. The recovery in global economy is likely to continue in 2018.
INDIA: AN OUTLIER WITH FOUR-YEAR-LOW GROWTH
India’s GDP growth will drop to a four-year low of 6.5 per cent in 2017-18, according to CSO’s advanced estimates. Growth has been impacted by the twin shocks of demonetization and GST. Of course, we can derive consolation from the fact that the economy is on the recovery path: Growth rate has picked up from 5.7 per cent in Q1 of 2017-18 to 6.3 per cent in Q2 and is expected to gather momentum and rise above 7 per cent for Q3 and Q4, mainly assisted by the base effect. The recovery notwithstanding, the slump in growth rate to a 4-year low, when the global economy is powering ahead, is indeed, a deficiency.
INDIAN ECONOMY IS AT AN INFLECTION POINT IN THE MACRO CYCLE
Apart from the double whammy of demonetisation and GST, the other major constraint on India’s growth has been the excess capacity in manufacturing. When there is excess capacity, capex will be poor and even a highly accommodative monetary policy will have limited impact. This was the reason why monetary stimulus didn’t lead to capex. With capacity utilization climbing, this will change in 2018. Private capex-led growth will begin in 2018.
There are some concerns on the macro front. Hardening crude prices, fiscal deterioration, rising inflation and the RBI turning hawkish can adversely impact the economy and market. A populist budget perceived negatively by the markets, and some major tinkering with the long-term capital gains tax are other risk factors.
Investment strategy in 2018 should be, ideally, defensive. Aggressive lump sum investment should be avoided at the present levels of valuations. Quality stocks may be bought on corrections. Small caps are over-valued and highly risky. Systematic investment in mutual funds should be continued.