2019: 5 big events to watch out for that would impact your portfolio

Your equity portfolio is typically vulnerable to big events, both domestic and global. When we talk of 2019, the first thing that comes to mind is the General elections. While that is surely one major consideration, it has been witnessed that markets reconcile to changes in the government. As long as the new government does not commit a volte face on the reforms process, the markets will not worry. The reforms process is irreversible and that is the good news.

Let us look five big events that will have a bearing on your portfolio (both equity and debt) in 2019.

As we stand today, the US and China have called for a temporary ceasefire in the trade war. The US has two demands from China: (i) reduction of artificial subsidies by the government, & (ii) respecting US intellectual property.

While the former may be easy to address, the latter may remain a bone of contention. China is desperate to get over the trade war considering it is an export-driven economy. For the US, it is still about collecting higher tariffs and directly compensating farmers and small businesses. Push comes to shove, China may just choose to downgrade the yuan’s value to keep its exports competitive but that would definitely affect your portfolio.

A growth slowdown impacts equity valuations but the bigger worry for the Indian portfolio would be if it degenerates into a currency war. A weak yuan will result in rupee weakness and lead to an FPI sell-off. That could also impact your bond portfolio as yields will get tighter.

1. Will the Fed Continue With its Hawkish Stance?

   The jury is still out on whether Jerome Powell will continue as the Fed chairman and whether the US Federal Reserve will stay hawkish in 2019. While Powell has hinted at rates being a function of GDP growth and consumption demand, the Fed may strategically choose to keep the rates hawkish to sustain strength of the dollar. With Republicans losing influence in the Senate, the Fed may continue with its independent stance. However, the hawkishness of the US Fed could be negative for your portfolio in two ways.

   Firstly, it will impel the RBI to maintain its hawkish stance in order to maintain the rate gap between the US and Indian treasuries. Secondly, Fed hawkishness means a stronger dollar, which is never a good news for the Indian markets in general.

2. Why are General Elections 2019 Important?

   Quite often, good politics results in bad economics. One thing that is clear after the state Assembly results is that the government is unlikely to relent on the pace of spending, especially when it comes to spending on improving rural incomes, alleviating farm distress, and improving rural demand. That will literally bid goodbye to fiscal prudence and the fiscal deficit could shoot up well beyond the 3.5% target.

   This problem gets more pronounced as GST collections have been below-target in most of the months. Higher fiscal spending will result in higher borrowings by the government, which will put pressure on yields. Also, foreign portfolio investors (FPIs) have been generally wary of the rampant government spending and could give a thumbs-down to this behavior. Furthermore, if an unstable coalition comes to power post the 2019 elections, it is likely to make the markets unhappy. Hence, the bigger concern here would be the medium-term impact of the elections.

3. Risk-off Shift by Retail Investors in India

   Despite the rampant ~Rs90,000cr sell-off by FPIs in 2018, the markets have not really corrected too sharply and the main reason for this strength are the domestic flows. In the last four years, the total AUM of the mutual fund industry has grown from Rs8tn to Rs24tn. Meanwhile, the average SIP inflows to equities are in excess of $1bn per month. This is happening largely because gold, realty, and debt have not been adequately rewarding over the last few years. More importantly, retail investors have come to experience the virtues of equity investments in just the last four years. But it also needs to be remembered that nearly five years prior to 2014, domestic mutual funds saw negative inflows on a monthly basis. If the markets display heightened volatility and stickiness at higher levels, then we could see a sharp turn in retail interest in equities. This could have serious implications for your portfolio.

4. Global Liquidity Tightness Haunts Indian Markets

The US Federal Reserve stopped fresh purchases of bonds nearly five years ago. Recently, the European Central Bank (ECB) also announced that it will stop fresh purchases of bonds from the market and the Bank of Japan (BoJ) may follow soon. Meanwhile, global stock markets have lost close to $15tn in wealth from their peak valuations in January and this wealth destruction is likely to impact liquidity in a big way. Then there are worries of Italian default if the nation opts out of the Euro. The underlying theme is that liquidity could be much tighter in 2019. We have already seen signs of liquidity tightening in 2018 and the macros and elections in India will combine to make liquidity even tighter in 2019. That will be a major negative for your portfolio.

Both equity and debt portfolios are subject to a plethora of risks in 2019, global and domestic. Investors need to have a clear strategy on how to tweak their portfolio mix and how to best hedge their downside risks in 2019.