Debt Market & Nifty Prediction for 2020 by fund managers.

2020 stock market, equity and bond market prediction

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. Investors can exploit these to grow their wealth. In this post, we have compiled the views from multiple analysts on their Nifty prediction and bond market performance for 2020

2019 – A Year in Review

The Sensex grew by 15.2% and the Nifty grew by 14.2% in 2019.

Let the numbers not fool you.

While the headline indices seem to have kept investors happy, the general economy saw lacklustre performance. The GDP growth in the July-September 2019 quarter saw a 6-year low with a 4.5% growth. 

2019 was an year of many ups and downs with a number of events related to defaults, PSU consolidation, crude oil prices, RBI rate cuts, US-China trade wars, corporate tax cuts, slump in GDP growth, telecom wars and political changes. Making Nifty predictions is a strong man's game.
2019 was an year of many ups and downs with a number of events related to defaults, PSU consolidation, crude oil prices, RBI rate cuts, US-China trade wars, corporate tax cuts, slump in GDP growth, telecom wars and political changes. Making Nifty predictions is a strong man’s game.

What went well?

  1. Policy stability with the Modi government being re-elected
  2. The Essar Steel case at the NCLT saw a clean resolution with financial creditors recovering over 90% of their dues
  3. 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
  4. PSU banks consolidation which allowed for recapitalization freeing up more money for credit growth
  5. Oil prices didn’t see any sudden spurts which keeps India’s balance of payment situation under control

What did not go so well?

  1. GDP growth rates falling to 4.5%
  2. Consumption slowdown at both urban and rural markets
  3. DHFL sent to liquidation which really jolted the Non Banking Financial Companies (NBFC) space and led to severe liquidity crunch
  4. Trade wars between the United States and China leading to financial market volatility 
  5. Erratic monsoon in several parts of India with droughts and floods leading to high food inflation

Stock markets continued to hit all-time highs albeit cautiously

Optimism and domestic fund inflows kept the equity stock markets reach newer highs. No one seems bothered that only 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%) and Nifty Smallcap 100 (-9%)

The tepid performance of companies below the top 50 was due to gross uncertainty in business fundamentals. This is in the backdrop of declining consumption, manufacturing, industrial and overall economic growth. Additionally regulatory changes kept investors on the fence. 

We also saw the theme of too much money chasing too few stocks in the sectoral indices aswell. Some stocks reached over-valued zone while other sectoral peers did not see any take-up. Financial and energy stocks were the largest contributors to large caps performance. On the contrary, realty and consumer durables were the best performing sectors. The stock market was driven more around quality rather than a broad based rally as in 2014 and 2017.

GDP Growth of Essential Sectors and the India Consumption Index

Image above represents the GDP Growth of Essential Sectors and the India Consumption Index

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.

In light of all, making Nifty predictions for 2020 is certainly requires a nostradamuscus skill

Even Nostradamus might have struggled with Nifty prediction for 2020
Even Nostradamus might have struggled with Nifty prediction for 2020

Indian Economy and Nifty Prediction for 2020

The economy of 2020 is on a recovering mode. 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 –

  1. Private consumption will take time to recover. Household savings rates are declining for the past 7 years and income growth failing to keep up with consumption growth.  
  2. Government consumption is likely to come down from the current levels
  3. Investments is like to be subdued as the private sector, government and households face income and balance sheet challenges. 

Nifty Prediction for 2020

The overall consensus is that growth’s worst nightmares are 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.

This is what most analysts are saying in giving their Nifty prediction –

  1. The first indication to growth will be the earnings recovery. The consensus of analysts expect considerable outperformance by India’s corporate earnings versus the other emerging markets. The researchers also believe that policy action cannot rest and needs to continue into 2020. Ergo, policy action will be the key trigger with the budget offering the first glimpse of government action.
  2. 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. This will, in turn, lead to a boost in global growth which will lift the stock markets.
  3. The big Nifty prediction for 2020 by equity analysts is the revival in domestic consumption. This 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 for given the subdued wage growth that the economy faces.

Importance of policy reforms

  • The government has played its cards and shown positive intent to spend on infrastructure projects. They have earmarked $1.4 trillion (₹102,000 lakh crores) over the next five years. This has boosted market sentiments. However, 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. This 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

Analysts are generally optimistic of equity markets

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 the 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 Market Prediction in 2020

Fiscal deficit and inflation will be key pointers in the new year.

The accommodative interest rate stance and surplus liquidity environment provided a stimulus for growth. However this ferments 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. This is 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. 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.

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