Three Trends That Could Play Out In 2019

If history repeats itself, 2019 will be a stellar year for beaten-down small and mid caps.

The Indian market remained volatile for the better part of this year on account of introduction of long-term capital gains tax on equities, mutual fund reclassification, higher oil prices, escalating trade tensions between the U.S. and China, a weaker rupee and liquidity crisis among non-bank lenders.

That led to a 17 percent and 30 percent slide in the Nifty Midcap 100 and Nifty Smallcap 100 indices so far in 2018, the worst rout since 2011, according to Bloomberg data. That compares with a 2.4 percent gain in the Nifty 50 Index during the period.

But since 2005, after every bad year, both the indices surged. For instance, after tumbling 59 and 71 percent in 2008, the mid- and small-cap indices jumped about 100 percent the next year. Similar trends were seen in 2012 and 2014. An election year, too, helps, the data show. Both the indices gained between 35 percent and 107 percent in two election years—2009 and 2014. In 2004, the Nifty Midcap Index jumped 25 percent. The Nifty Smallcap index was created in 2005.

“2019 will be the year of mid and small caps owing to strong fundamentals and reduced valuations,” Sudip Bandyopadhyay, group chairman of Inditrade Capital, said. These stocks, he said, are also expected to offer higher returns than the large caps.

But Deven Choksey, managing director of KRChoksey, sees value in only select counters. He doesn’t expect investors to offer premium valuations to these stocks in the near term.

Nifty IT Index

The Nifty IT Index gained as much as 40 percent in the first nine months of this year as the rupee weakened. The gauge, however, lost more than one-thirds of its gains as the domestic currency appreciated against the dollar and on fears of a growth slowdown in the U.S. and Europe.

And past trends suggest that 2019 could be bad for the 10-stock index. Since 2005, the gauge declined for two straight years after two years of gain.

The Indian IT sector continues to face competitive pressures from pricing-led margin and protectionism measures, brokerage Nomura said in a note.

The average estimate of analysts tracked by Bloomberg, however, suggests TCS and Infosys could rise 9-18 percent over the next 12 months. Also, other than Wipro Ltd., none of the other IT stocks are expected to fall during the period.