For stocks, next year may be a 'tale of two halves'

Investors should be defensive in portfolio but opportunistic in approach in the year 2019 through the pre-election period, according to experts.

In its India Strategy 2019 report, brokerage Edelweiss said that the country in 2019 will be "a tale of two halves". In the first half, it will be "defensive in portfolio but opportunistic in approach", while the second half would be "measured but an extended upcycle".

"A day can be long time in politics; an election year will feel even longer for India's markets," it said.

The report said the country has been interrupted by global macro shenanigans, a credit scare and an impending election. This would keep the market volatile and valued around means, and may provide more opportunities than returns, with Nifty to hover around 9800-10500 points till the elections.

The brokerage in its report said it will run a relatively defensive portfolio, with large cap across sectors such as banks, consumer staples, IT, and pharmaceuticals while keeping an eye out for opportunities.

According to the report, one should play safe in the first half when global macros, noise around elections and interpretations of exit polls will have its impact on the market and stocks, while the second half should be "a return to a more optimistic normal".

"The second half should be a smoother ride," the report penned by Aditya Narain, Prateek Parekh and Padmavati Udecha said.

The report said in the current year, there has been disruption in fixed income market, a foreign exchange reset And an altered equity market valuation framework

"That is hurting, but even as it claws back, we see this phenomenon as a cycle interrupted. We do not believe it's a cycle disrupted. And we argue that this business cycle – across earnings, de-leveraging, investments, asset resolution and consumption – albeit extended and shallower than previous cycles (and expectations) should start rearing its head up," the report said.

It said that elections are a "dividing line" which is more a "baton change event" than a "finishing one", considering the diminishing relative market performance across different governments, limited specific economic agendas on display and poor track record of opinion polls and the market.

"...the markets ask is for continuity over policy, which sets a low bar," the report said.

The time to reap these gains will be once the interrupted business cycle comes back to the fore, with a little more risk appetite in the economy and valuations become more generous with Nifty around 11,800 by December 2019. However, an unstable government will disrupt the valuation generosity even if it does not disrupt the business cycle, it said.

An analyst, who did not wish to be named, said the market will remain volatile till elections. "The first half of 2019 will be volatile, given it is an election year and we have impending various state elections and the central election. The recent by-polls results indicate that it will be a tough fight between the BJP and the Opposition. Hence, the first half will be a difficult one while the second half will be very good," the analyst said.