Market at lifetime high but check out these 6 key risks before investing

After nearly six months, the market is back at its record highs as the Sensex decisively crossed the 37,000-mark and the Nifty climbed above 11,200. Earlier on January 29, benchmark indices touched lifetime highs. Since then it has corrected (especially after the Union Budget 2018-19), followed by a gradual recovery which started in the last week of March, with intermittent consolidation.

The Nifty surged 7 percent and Sensex gained 9 percent in the current calendar year in addition to around 28 percent rally seen in 2017. It was driven by a few largecaps (majorly index heavyweights) and consistent domestic money flow when foreign institutional investors were selling India and emerging markets in general.

The major reason behind this upsurge is stable June quarter earnings and hopes of a further recovery from now onwards, likely easing of asset quality concerns, and stability in global markets on fading trade war tensions, crude oil prices and rupee-dollar movement.

“The other reasons for the strong bounceback in the Indian stock market can be attributed to economic recovery, which is currently underway with key beneficial policy decisions like the Goods & Service Tax now better entrenched into the system and corporate earnings indicating some pick-up,” Jayant Manglik, President, Religare Broking, said.

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He added that factors like underperformance of competing asset classes like real estate and bullion have also supported capital flows into equities. “Going forward, considering the market momentum, one should expect newer milestones to be achieved in coming months.”

The broader markets also participated in the rally with the Nifty Midcap and BSE Smallcap indices surged over 4 percent last week. However, both are still down 13 percent and 15 percent in 2018, respectively. These indices are still trading at hefty premium to largecaps, experts said.

“We believe that this divergence between large- and midcaps may continue for some more time. Midcaps still trade at a 20-25 percent premium to the Nifty in terms of P/E and thus could be vulnerable in a volatile market,” Siddharth Khemka, Head- Retail Research, Motilal Oswal Securities, said.

After such a sharp uptick, does it mean all concerns are behind and the market will move upwards from here on? Experts feel it is difficult to answer.

The stated that a rally could be possible considering the likely earnings recovery and returning of FII flows last week, but one should take into account that there are some risks, which could spoil the party at any time.

Shailendra Kumar, CIO, Narnolia Financial Advisors, said the Nifty now trades at 21 times FY19 earning and that makes it vulnerable to negative surprises, if any. “We expect earnings of Nifty constituents to grow by more than 20 percent in FY19. Any disappointment here would be the reason to get cautious at least in the near term.”

The first is rising 1) crude oil prices, which is one of the key risks to a country like India which imports more than 80 percent of its requirement. For the last couple of weeks, after seeing a sharp rally up to $80.50 a barrel in June, oil prices recovered and stabilised in the $72-75 a barrel range on expected increase in supply.

“Any strength in crude oil prices will continue to put pressure on the current account deficit and domestic currency,” Jayant Manglik, President, Religare Broking said.

Some of other factors that can affect investor sentiments are: 1) Inflation and interest rates; 2) Political developments; 3) Rupee-dollar movement; and 4) Global trade war which has a limited impact on India.

“The major risks we foresee for Indian markets are – rising US interest rates, crude prices and movement of the dollar-rupee – which in turn is dependent on US interest rates,” Abhinav Gupta, President-Capital Markets, Share India Securities, said.

Going forward, Waqar Naqvi, CEO, Taurus Mutual Fund, said one needs to watch out for global trade war intensifying, withdrawal of stimulus by the major central banks, movement of crude prices and impending domestic state and central elections. “Any adverse dramatic development on any of these points should make investors cautious although the long-term bullish outlook on Indian stocks remains intact.”

While explaining some of these concerns, Manglik said firming inflation and rising domestic interest rates could pose some hiccups to India Inc, if consumer demand falters, as the cost of capital firms up.

Mohit Ralhan, Managing Partner and Chief Investment Officer at TIW Private Equity, said the biggest risk to the global bull run in equities is inflation and deglobalisation. “Globally, inflation is moving higher creating a serious risk to the 30-year bond bull market. Interest rates globally are moving up, which poses a serious threat to liquidity driven returns.”

He said the ‘Trump tax’ rhetoric is creating a manufactured risk to global trade that can lead to a significant dent in global GDP growth rate. “This coupled with multiple key state elections leading up to 2019 elections in India can have a potentially detrimental effect on market returns from a one-year horizon.”

Manglik too concurs, saying several key state election outcomes before the general election in 2019 will keep the domestic political scenario a bit hazy. “On the global front, escalation on the trade war front remains the key risk at this point in time.”

On top of these above five risks, Kumar said 6) non-performing assets (NPAs) of banks, which has systematically hurt the business environment for long, is expected to have peaked now. “Any relapse on this count would cause de-rating of the valuation multiple.”

He advises investors to focus on good quality companies that have decent earning visibility over the next 2-3 years.