Mixed signals

Investors in the Indian stock market will remember 2018 as a frustrating year in which nothing panned out as expected. True, India’s bellwether indices put up a resilient show amid a rout in the global gauges. The Nifty50 and Sensex30 ended the year with gains of 3.5 per cent and 6 per cent, respectively, while the US benchmark lost 6 per cent, the European gauge sank by 14 per cent and the Chinese composite tumbled by 25 per cent. A strong dollar, rising US rates and trade wars had foreign portfolio investors (FPIs) stampeding out of emerging markets and pulling out $4.5 billion from Indian equities. Brisk inflows into domestic equity funds counter-balanced this. But this outward show of resilience didn’t reflect in retail portfolios which took a severe battering. With 85 per cent of the listed stocks in the red, investor wealth in listed equities eroded by ₹7.25 lakh crore in 2018.

Many factors made the broader market decouple from bellwether indices this year. A major overhaul of the fund industry with SEBI ushering in watertight categorisation rules, forced equity fund managers to shed their excessive weights in mid- and small-cap stocks. Stringent action by SEBI to curb market manipulation through added surveillance dried up liquidity in less-known counters. A spate of accounting and governance issues at mid-sized firms, ending with the IL&FS blowout, seriously undermined investor confidence and triggered a further flight to safety. As these factors have helped dissipate the speculative froth that had built up around the mid- and small-cap segments of the market during the four-year bull run, 2019 is unlikely to see a broad-based revival in these stocks, and that is a good thing. But 2019 may prove a tough year for the bellwethers to deliver an encore as well. With volatile oil prices, general elections and populist policy-making in the run up to it likely to dominate the narrative in the coming months, it is unlikely that FPIs will raise their India allocations in a hurry. Domestic retail appetite for equities is always a function of recent returns and negative returns from majority of active funds in 2018 is likely to dampen local equity flows in 2019. With stock prices correcting and profit growth returning to double digits, the gap between expectations and reality for India Inc narrowed this year, but not so much that equities have turned a screaming buy.

Overall, 2019 promises to be yet another year in which domestic equity investors will have to endure a bumpy ride in the hope of long-term reward. But that is the nature of the beast and the regulator has no role to play here. But the bigger challenge for Indian investors today is that their rising appetite for equities is being met by a stagnant pool of investible stocks consisting of just 200 or 250 names. Addressing this supply problem and ensuring that the listed universe attracts vibrant, high-quality businesses should be SEBI’s top priority in 2019.

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