MUMBAI: The markets maintained 2017's celebratory mood through to the year's last day of trading, with the Sensex closing at a record 34,056.83 amid robust equity shopping by both domestic and foreign institutional investors (FIIs). The Sensex rose 0.62% with Tata Motors, Axis Bank and Tata Consultancy Services logging gains of about 3% each. The BSE Sensex ended 2017 with a gain of 29.58% while the NSE Nifty rose 30.28%. India was the third best emerging market in the world this year after Argentina and Turkey, according to Bloomberg.
Smaller Indian stocks did even better—the BSE midcap index rose 48% while the small cap surged 60% in 2017. FIIs invested Rs 51,000 crore in 2017 while mutual funds pumped a record Rs 1.16 lakh crore into equities, reflecting a transformation in the country's savings culture that was triggered by demonetisation in November last year. Investors have shifted from physical savings to financial savings, leading to a sharp inflow into equity mutual fund schemes. The continuation of that trend should mean more money flooding into the markets in 2018.
To be sure, after clocking substantial returns in 2017, equity investors enter the new year with a number of macro challenges and worries on earnings growth weighing on their minds. They will be keeping a close watch on rising oil prices, lower goods and services tax (GST) collections and a burgeoning fiscal deficit. In addition, in the second half of the year, the gaze of the market will begin shifting toward the 2019 Lok Sabha election.
'To be a Stock Picker's Market'
"We will go through a challenging macro environment in the coming year as crude oil prices are going up, inflation is rising and the current account deficit is deteriorating," said Kotak Mutual Fund MD Nilesh Shah. "It will be a stock picker's market and there will be moderation in returns with volatility."
Analysts expect earnings growth will perk up in the next few quarters because of the lowbase effect on account of demonetisation and its disruptive effects.
They expect real earnings growth to have picked up pace from the June quarter next year, as reforms and the implementation of GST, which was rolled out July 1, start yielding returns.
"We have seen corporate earnings reverse its trend from the second quarter onwards and the second half of the year is expected to continue the direction amidst improving consumption-led demand on the back of a good monsoon in 2017," said Axis Securities CEO Arun Thukral.
"While 2017 was an exceptional year, going ahead, returns from equities are likely to track earnings growth," said Gopal Agrawal, chief investment officer, equities, Tata Mutual Fund.
Analysts expect benefits of GST to be visible in 12-18 months as companies become comfortable with the new tax regime, revenues improve and consumption rises following a drop in prices for end users. Among the reasons for the slump in GST revenue was a steep cut in rates in November.
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