From the trade war between US and China to the liquidity crisis at IL&FS, a number of events in financial year 2018-19 had an impact on the Indian equity markets.
The markets were mostly stable in the calendar year 2017, but volatility hit Dalal Street in FY 2018-19. The INDIAVIX Index, which gauges volatility in the Indian equities, touched a high of 22.8 and low of 9.40.
The Bombay Stock Exchange benchmark index Sensex gained around 15 per cent in the FY 2018-19, though midcap and small cap indices gave negative returns of 5 per cent and 12 per cent, respectively.
Energy and information technology sectors gained in the range of 23-24 per cent, followed by the banking sector at 22 per cent. However, the telecom sector witnessed a fall of more than 22 per cent followed by the auto and metal sectors, which dipped around 15-20 per cent.
As we bid adieu to the fiscal, here’s a look at some of the events that kept the Indian equity markets on its toes.
Introduction of LTCG
The year began with the re-introduction of long-term capital gains tax (LTCG). Finance minister Arun Jaitley levied a tax on profit generated from equity shares where investors had to pay 10 per cent tax on profit exceeding Rs 1 lakh. The market reacted negatively as market participants termed the measure as a major anti-investor decision.
SEBI mutual fund reclassification
The year also witnessed a complete overhaul of categories for mutual funds. As per the SEBI mandate announced in 2017, a fund house could offer 10 types of equity funds, 16 bond funds and 6 categories of hybrid fund schemes which resulted in a short-term turmoil in the broader markets. Investors have to keenly monitor their funds on a regular basis as AMFI reclassifies the category of stocks every six months and can churn the holdings, resulting in several stocks exiting the portfolio.
Introduction of ASM
To safeguard investor interest, exchanges introduced additional surveillance measures (ASM) to address increased speculations and a sharp fall in stock prices. This includes reduction in price band, periodic call auction and transfer of stocks to T2T category. The securities which are placed under the framework are reviewed on a bi-monthly or periodical basis. Initially, the measure created panic among investors and stocks which come in the ASM list witnessed volatility.
US-China trade war
In FY 2019, the US and China engaged in a trade war imposing import tariffs on goods and services from both nations. By the end of the year, China and the United States agreed to negotiate trade terms and halted additional tariffs during the period. Hopes of a truce between the two countries have surged ahead of the Presidential election in the US next year.
In September 2018, a huge liquidity crisis hit Infrastructure Leasing and Financial Services (IL&FS) as the lender defaulted on payments and failed to service its short-term commercial papers. The news rocked the debt and equity markets simultaneously. Following the crisis, healthy correction was witnessed in most NBFC stocks on fears of liquidity crunch.
Crude & rupee tussle
Crude oil prices and the rupee witnessed turbulent movement during FY 2019. Crude oil prices surged to $86/barrel amid supply and geopolitical concerns. Meanwhile, a strong dollar weighed on the Indian rupee for most part of the financial year.
PSU banks consolidation
FY 2019 witnessed the consolidation of PSU banks with mega merger of Bank of Baroda, Dena Bank and Vijaya Bank. LIC also increased its stake in IDBI Bank from 11 per cent to 51 per cent.
Though the Punjab National Bank-Nirav Modi scam was unearthed in February 2018, its impact in the financial sector was felt in fiscal 2019. The Rs 14,000 crore fraud at PNB resulted in sudden crash in the major PSU banking stocks.
RBI governor's resignation
A major shocker came in December 2018 when RBI governor Urjit Patel announced his resignation citing personal reasons. The resignation came on the heels of a rift between the government and the RBI over issues of liquidity and the usage of the central bank’s reserves. The government soon named Shaktikanta Das as the new RBI governor.
The country was stunned by the sudden attack of militants on a convoy of vehicles carrying security personnel in February 2019 in Pulwama district of Jammu and Kashmir which killed 40 CRPF jawans. The quick response of the Indian government through surgical strikes at Balakot, Pakistan, increased the possibilities of the BJP-led NDA returning to power in the general elections 2019. This development fueled investor sentiments and money flowed into mid cap and small cap stocks as most of the companies were available at attractive valuations.
As we head into a new financial year, what troubles the world economy is the fear of a global recession. While data points at a slowdown in growth, the Indian economy seems quite resilient and optimistic.
The major event risk for Indian markets at this point is the outcome of the general elections slated to be held in April-May 2019. Unlike 2014, the political outcome is unclear this year.
Given these circumstances, cyclical sectors, capital goods are favourable for investments. Growth should also boost consumer discretionary such as automobiles. State-owned banks could be a dark horse in fiscal 2020 on account of the peak in NPL cycle, recovery of NPL’s through IBC and low valuations.
The author is CEO, Karvy Stock Broking