Here we are, halfway through 2018 and halfway through the earnings rebound. As we rightly cautioned in our January edition, thus far, it has been a roller coaster ride for Indian equity markets. Nifty made a new high @ 11,130 at the beginning of the year, but could not sustain those levels and has risen paltry by 1.7% YTD. Having said that, Midcap and Smallcap indices have charted a different path when compared to their larger peers, as they have retraced (from peak levels) almost 16% and 25% respectively.
Two themes which we highlighted in our January edition were that the earnings will improve even if on a low base and that the valuations will revert to mean by a decisive combination of price and time correction, both of which have played out to some extent.
On the global front, trade war concerns have been the cause of anxiety and rising Oil prices are adding fuel to the fire, literally. If the tariffs get more aggressive between US and China, it might lead to a contagion effect and that could hamper the global growth which has just started to find its way back.
On the domestic front, high-frequency growth indicators are demonstrating strength, but we continue to expect near-term challenges in other macroeconomic indicators due to rising Oil prices and weakening domestic currency. We believe that the global trade war concerns, rising oil prices, weakening macro and lower FII flows vs. strong domestic flows will continue to lead the market movement, but it is the earnings momentum that one needs to watch closely in the coming days.
Valuations, continue to remain high relative to its own history and bond market yield. Having said that, the risk-reward ratio still looks unfavourable for equities in the short term and we continue to be cautious on equities market on a short-term basis. Any exposure towards equities should be done in a gradual manner and preferably in the Large-cap space. Keeping in line with our cautious stance we have added exposure to the pharma sector in our model portfolios, given the margin of safety they currently offer.
We reiterate our cautious stance in the fixed income space, due to weakening currency, elevated commodity prices, and fiscal pressures. We continue to recommend investments in Short-term and Accrual funds.