If 2019 was a year of consolidation, 2020 promises to be a year of evolution. There are good pockets of opportunities available in the equity and debt markets which investors can exploit to grow their wealth. In the post, we have compiled the research information from multiple analysts with their views of how the stock market and bond market will perform in 2020
2019 – A Year in Review
Let the numbers not fool you. While the headline indices i.e. the Sensex (15.2% growth) and Nifty (14.2% growth) seem to have kept investors happy, the broader markets like the general economy saw lacklustre performance with the GDP growth in the July-September quarter seeing a 6-year low with a 4.5% growth.
What went well?
- Policy stability with the Modi government being re-elected
- The Essar Steel case at the NCLT saw a clean resolution with financial creditors recovering over 90% of their dues
- Corporate tax cuts to help make Indian manufacturing more competitive relative to other Asian economies like Vietnam, Thailand and China. The profit after tax of listed companies to jump by 8-9% over this move
- PSU banks consolidation which allowed for recapitalization freeing up more money for credit growth
- Oil prices didn’t see any sudden spurts which keeps India’s balance of payment situation under control
What did not go so well?
- GDP growth rates falling to 4.5%
- Consumption slowdown at both urban and rural markets
- DHFL sent to liquidation which really jolted the Non Banking Financial Companies (NBFC) space and led to severe liquidity crunch
- Trade wars between the United States and China leading to financial market volatility
- Erratic monsoon in several parts of India with droughts and floods leading to high food inflation
Markets continued to hit all-time highs albeit cautiously
Optimism and domestic fund inflows kept the equity stock markets reach newer highs as a handful of stocks drove the markets up. This led to a situation where the marquee indices like Nifty 50 and Sensex showcased their charms on the growing cult of Indian investors while broad based markets languished. To put the growth of several indices into perspective –
- Nifty 50 : +12%
- Nifty Midcap 100 : -4%
- Nifty Smallcap 100 : -9%
The tepid performance of companies below the top 50 was due to gross uncertainty in business fundamentals in the event of declining consumption, manufacturing, industrial and overall economic growth plus regulatory changes which kept investors on the fence.
This same theme of too much money chasing too few stocks was seen in the sectoral indices aswell as some stocks reached over-valued zone while other sectoral peers did not see any take-up from investment activity. Financial and energy stocks were the largest contributors to large caps performance while realty and consumer durables were the best performing sectors. The stock market was driven more around quality rather than a broad based approach as we saw in 2014 and 2017.
While the Indian economy had many a downside (2019 was a tough year) on the growth front, the rate cuts by the RBI (Reserve Bank of India) had a cushioning effect. Since the five rate cuts since February 2019, the yields on 10-year G-Sec have declined by 135 bps.
What to expect from the Indian economy and stock markets in 2020?
The economy of 2020 is on a recovering mode and the outlook is not expected to become rosy without small bumps on the way. The challenges for this year will be in the form of –
- Private consumption will take time to recover with household savings rates declining for the past 7 years and income growth failing to keep up with consumption growth.
- Government consumption is likely to come down from the current levels
- Investments is like to be subdued as the private sector, government and households face income and balance sheet challenges.
Equity Markets in 2020
The overall consensus is that the worst for growth is behind us and 2020 is poised to be the start of a new chapter in Indian economic growth. While the bad news did spook the equity markets, it also pushed the policy makers to take decisions on an accelerated basis and with much more purpose.
- The first indication to growth will be the earnings recovery and the consensus of analysts expect considerable outperformance by India’s corporate earnings versus the other emerging markets. And while earnings growth is set for improvement, the researchers believe that policy action cannot rest to ensure that both growth and stock prices sustain well into 2020. Ergo, policy action will be the key trigger with the budget offering the first glimpse of government action.
- There is expected to be a continuation of coordinated easing of monetary policy by major global central banks. This easing of the interest rate scenario is expected to improve overall consumption leading to a boost in global growth which will lift the stock markets.
- The big prediction for 2020 by equity analysts is the revival in domestic consumption which will largely depend upon the measures taken in the budget and lagged effects of fiscal and monetary push. Credit growth is certainly expected to improve in an environment of falling interest rates and improvement in the asset quality of banks aided by better NPA recovery. However, most agree that a sharp recovery in consumption is too much to ask given the subdued wage growth that the economy faces.
- The government has played its cards and shown positive intent to spend $1.4 trillion (₹102,000 lakh crores) on infrastructure projects over the next five years. This has boosted market sentiments. It is important to note that higher reliance on private capex may be difficult to achieve given the soft demand conditions and moderate capacity utilisation levels.
- A big push is on the way in 2020 for policy reforms led growth which includes further inroads into policy implementation as a result of announcements pertaining to corporate tax rate cuts, allocation to bank recapitalization, reforms in key sectors like land and labor, power, housing and telecom. The focus will be on rectifying –
- the government striking a balance between spending requirement to boost economic growth and lower tax revenue
- banks grappling with poor asset quality
- increased leverage in corporate balance sheets in an environment of lower capacity utilization levels and moderate demand
- high consumption and low income growth weighing on the household balance sheet
Overall, policy related initiatives, government taking the onus for growing and cheaper valuations in the mid & small cap segments suggests a likely trough whereby the worst risks may be over with segments of equities offering a reasonable margin of safety. Most analysts believe that Indian economy and corporate earnings growth are set for a gradual recovery over the next 1-2 years
From an investment perspective, diversified equity funds with core exposure to large caps and mid & small cap segment which offer relatively favourable valuation after the recent correction may together present a medium to long term opportunity within the equity market.
Debt Markets in 2020
Fiscal deficit and inflation will be key pointers in the new year. While the accommodative interest rate stance and surplus liquidity environment provided a stimulus for growth, there is a fear that this will eventually stoke long term inflation. Analysts see liquidity draining out of the system as the transmission of rates takes place. They also see interest rates remaining stable over the course of 2020 unlike 2019 where the RBI had five rounds of repo rates cut.
From an investment point of view – there is a view that AAA long corporate bonds currently offer attractive investment opportunities for long term investors looking to lock-in rates. Now as the economy revives, analysts believe that this strategy is likely to remain attractive as compared to short term strategies and tax free bonds.
Credits is another theme. The AA segment, while it looks attractive, only investors who understand credit risk and are not uncomfortable with some short term volatility should invest in highly diversified largely AA oriented credit funds. This attractiveness comes on account of reasonable spreads between AAA & AA curves making them attractive bets from a risk reward perspective.