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Investment Outlook - 2019

Key Points:

  • Each year, investment and wealth outfits begin by making forecasts / predictions for the upcoming year. Last few years of history has made us realize that forecasting asset performance from year to year has been met with success, but only on a random basis.
  • Thus, calendar year (CY) 2016 witnessed most of the consensus forecasts being challenged. That year was a year for contrarian. There were calls for Oil declining to $10 levels, Trump not getting elected, Brexit not materializing, Demonetization came unanticipated and so on.
  • CY 2017 proved to be a very different year with most of the forecasts getting overwhelmed. That was also a year when all markets witnessed an uptrend following a globally synchronous recovery. After 1964, world over, the year witnessed lowest volatility on record.
  • CY 2018 began on the back of a very ‘brilliant’ year for investors, with momentum getting carried forward. An unabated rise in indices and currencies, world over, had already caused positions and valuations to look quite overstretched. As we look back, 2018 turned out to be a year, quite tumultuous and volatile, where Cash has been the king, world over (exhibit 1).
  • In a way CY 2018 has been one of the ‘normal’ years in this cycle, measured from 2008 till date. Barring CY 2017, all other years have witnessed double digit volatility (exhibit 2).
  • How would CY 2019 look like? As mentioned above, annual forecasts have only a random chance of being accurate. However, accuracy of forecasts tends to be relatively higher in longer term, especially for risk assets like Equities. Why? Because “History doesn't repeat itself but it often rhymes” (Mark Twain). Refer exhibit 3 below and it’s clear that over very long history of Indian markets, probability of reasonable performance tends to be very high with lower volatility / risk.
  • In this note we delve further into the longer term driver of Equities and the factors which often tend to affect the short term moves. We are conscious that investors are quite concerned about the event risks associated with impending elections.
  • The probability of significant deviation from long term forecast are rather low. We believe 2019 is a year of accumulating equities gradually/systematically. Debt offers good value in present context, offering very high ‘Real Yield’.