Indian markets are up 25 per cent this year, as we come to the fag end of 2017. A gush of inflows into mutual funds has led a stellar rally in the Sensex and the Nifty. The rally which began after the Union Budget 2017-18, has hardly stopped. In fact, there have hardly been any meaningful declines in the last 10 or 11 months.
Why 2018 will not match 2017?
For 2018 to deliver similar returns like 2017 (return of 25 per cent) the Sensex by next year has to be close to 39,000 points.
This is unlikely to happen on account of a host of reasons. In fact, even the most optimistic predictions for the Sensex by analysts are not targeting such high levels.
There are a number of reasons why the market is unlikely to give the same stupendous returns in the coming year and let us examine some of these. From fundamentals to politics we deal with each issue separately.
Most expensive market
Indian markets are the most expensive markets, thanks to Sensex trailing p/e multiple of close to 25 times.
In fact, most emerging and developed markets have p/e ranging from 10 to 20 times. The markets are sustaining at such high levels, purely on the basis of liquidity into mutual funds. Once this gush of liquidity ends, we might see some pull back in the markets.
Earnings have to improve for the market to remain at such high levels. Some are pencilling in a growth of just 10 per cent in corporate earnings growth in 2017-18. That is just not good enough to sustain the market at such high levels.
Closer to the general elections
Things may get a lot more complicated for the ruling party as we approach the general elections in 2019. It is unlikely that the BJP would be able to retain the same level of seats as in 2014.
This is simply because the BJP has won all of the seats in Gujarat, Delhi, Rajasthan and almost a sweep in UP, MP, Bihar and other places in the 2014 elections. In some states it has won all of the seats and the question now is: How can you better 100%?
This means that it is highly possible that the mandate for the party could be reduced. At the moment it looks certain that the party may not be able to better its 2014 tally. As we draw closer to the general elections in 2019, markets are likely to be more volatile.
Interest rates may have bottomed put
With retail inflation for the month of November spiking well above the RBI's comfort level of 4 per cent, it is likely that the RBI may stay pat on interest rate.
In fact, some economists are now betting on inflation gaining momentum and hence an increase in interest rates.
Rising interest rates do not augur well for the economy, which is one more reason to be a little more pessimistic on the markets. In short, if you are looking to invest large sums in the market, it could be rather dangerous. the best thing now would be to wait for declines.