From stock markets to banking system, what to expect in Lok Sabha poll year

Even though it has been repeatedly discredited through the ages, the popularity of soothsayers never dims. Emboldened by the same and fortified by some good Christmas spirit, I too will try my hand at prophesying what will happen next year knowing full well that I will be wrong on many fronts.


Data clearly shows that the political affiliation of the government has little or no impact on India’s economy (since there are almost no ideological differences regarding economic policy between India’s main political parties). Among the more certain things in India, life is reversion to the mean in Indian politics. So after an unusually decisive General Elections in 2014, the chances are high that we will end up with a coalition government of some sort after the 2019 elections. If the stock market corrects in the wake of the same (especially if the Nifty breaches 9,500 points), it would make sense to look for buying opportunities. 

After a decade of quantitative easing-fuelled economic gro-wth, the big economies are showing clear signs of slowing down. This in turn means that commodity prices in general and oil prices in particular could stay subdued in 2019. Beyond the general relief that this can provide to India’s current account deficit and fiscal deficit, weak commodity prices are an ally of small and mid-cap companies. Such companies rarely have bargaining power with their clients; hence, in a rising commodity price environment (like the first half of 2018) their profit margins tend to get squeezed. The opposite scenario should hold in 2019.
India’s real estate tends to move in decadal cycles. So after an epic bust between 1995 and 2004, we had an even more spectacular boom between 2004 and 2014. The real estate downturn that started in 2015 looks likely to continue for a few more years as: (a) residential rental yields at around 2-3 per cent remain absurdly low and would deter most sensible people from buying a house; (b) the cost of home loans has risen by around 1.5 percentage points in 2018 and should continue rising in 2019 as money becomes dearer globally; and (c) legions of bankrupt real estate developers look likely to enter the liquidation process at the National Company Law Tribunal in 2019 as the willingness of housing finance companies to evergreen their developer loans is muted after the IL&FS fiasco. Beyond flats, for hard assets in general – land, shopping malls, factories, roads – 2019 could be the year when sanity returns to their valuations. Investors who have the skills to spot bargains in this segment are set for a feast. 


The key challenge at home in the year ahead is India’s banking system. No government seems to have the courage to privatise the massive and moribund public sector banks which used to be the mainstay of the Indian banking system. Into the vacuum created by the demise of these banks have stepped in non-banking financial services companies which are: (a) highly levered i.e. debt:equity is between 8-12x; (b) running extreme asset-liability mismatches ie borrowing in the 3-12 month money market and, in the case of the housing finance companies, giving 20 year home loans; and (c) following opaque accounting practices. This in turn has created major systemic risks in the Indian financial system and I continue to believe that it is just a matter of time before these risks come home to roost. The challenge for those of us who earn a living from the stock market is that once a financial system is blown apart, it takes many years to rebuild it.
Saurabh Mukherjea is the author of The Unusual Billionaires and Coffee Can Investing: the Low Risk Route to Stupendous Wealth.  

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