At ₹93,349 crore, until December 17, net inflows of foreign portfolio investors (FPIs) into the Indian equity markets have been the best in the last five calendar years since 2015. In fact, the FPI inflows in 2019 are higher than the annual total of equity inflows of ₹89,268 crore in the three years from 2015 to 2017. The 2019 inflows are also commendable given that 2018 saw net outflows of ₹33,014 crore.

But, there is a widespread disparity between the indices. Take the case of the S&P BSE Sensex and the Nifty 50; both touched new life-highs, as well as 52-week highs of 41,614.77 and 12,237.7 respectively. On December 18, at the end of the trading session, at 41,558.57 and 12,224.6, the Sensex and the Nifty 50 recorded an absolute increase of 14.63% (5,304 points) and 12.05% (1,315 points) from the 36,254.57 and 10,910.1 points, respectively, on January 1 this year.

Contrast these bumper performances to the S&P BSE 500, S&P BSE MidCap, and S&P BSE SmallCap, and the disparity stands out. While the S&P BSE 500 touched its life-high of 15,937.92 on September 3 last year, the current 52-week high is 15,742.11, a difference of 1.23%. At the closing value of 15,653.35 on December 18, the BSE 500 has gained 7.31% (1,066 points) from the closing value of 14,587.25 points on January 1.

However, the S&P BSE MidCap and S&P BSE SmallCap, which closed at 14,789.29 and 13,387.13 points on December 18, have lost 4.13% (637 points) and 9.34% (1380 points), respectively, from their January 1 closing values of 15,426.38 and 14,766.86 points. When the MidCap and SmallCap’s life-highs are compared to their current 52-week highs, the differences are stark.

The MidCap index, with 52-week high of 15,661.95 points on April 3, this year is down 14.52% (2,659.42 points) from its life-high of 18,321.37 points on January 9 last year. The divergence is much higher in the case of the SmallCap index, whose current 52-week high of 15,229.85 points on April 1 this year, is down 24.54% (4,953.6 points) from its life-high of 20,183.45 points reached on January 15 last year.

Analysts at Kim Eng Securities India, led by Jigar Shah, in a December 12 note pointed out that in 2019, the Nifty 50 has outperformed small-cap and mid-cap indices by 15%. “Historically, on a 5- to 10-year basis, the small-caps and mid-caps [have] returned higher or similar to the Nifty,” the analysts said. “Excluding the top 15 gainers, the Nifty would have returned negative in 2019; and unless the current slowdown reverses, this performance is not repeatable in 2020,”they added. “A more broad-based participation of stocks and sector rotation is a more likely trend in 2020.”

Shah and his colleagues have a neutral view on India, with a base-case Nifty target of 11,600. However, their base case lacks upside. Listing the probables, Shah and his team pointed at the government’s bold actions in the Union Budget in February 2020, which may bring in positive catalysts such as fiscal expansion to carry out capex and a cut in personal income tax/goods and services tax (GST). “These measures if executed well could bring out the animal spirits in the Indian economy and drive its GDP (gross domestic product) growth back to 6%, or more,” the analysts note. “In addition, the [Narendra] Modi government’s overdrive on privatisation and agreement to join a large trade block in 2020 may be perceived positively.” In the bull case, their Nifty target is 13,400, while in a bear case of a prolonged recovery, their Nifty target is 9,900.

Interestingly, in a December 17 note from ICICI Securities, analysts Vinod Karki and Siddharth Gupta expect the earnings of the Nifty companies to grow 17% CAGR during FY19-FY21 and apply a one-year forward multiple of 17.7 times to arrive at their December 2020 target of 13,100. In the duo’s view, absolute returns at high single digits for the Nifty stocks during 2020 are constrained by the sharp run-up in stocks during the current quarter of 2019, thereby stretching equity valuations. “We expect small-/micro-caps to outperform mid-caps, as the former asset classes have much higher margin of safety in terms of the risk-spread over large-caps,” the duo note.

Earlier, in a December 9 note from Credit Suisse, analysts led by Neelkanth Mishra, noted that 2020 should see an inflection point in risk in the mid-year. Interestingly, Mumbai-based Mishra, managing director, India strategist and co-head of equity strategy-Asia-Pacific for Credit Suisse, was appointed to the Prime Minister’s economic advisory council in October this year. In that context, when the Mishra-led trio of analysts write “economic slowdown may continue to worsen”, that statement deserves much more weight.

“The sharp slowdown in economic growth has been led by industry, which has driven nearly two-thirds of drop in growth over the past six quarters,” the Credit Suisse analysts noted. In their view, this has been exacerbated by destocking due to monetary tightness; double-digit decline in power demand in October/November was likely due to cuts in production to respond to excess inventory at the end of the holiday season.

While inventory adjustments end naturally, the trio still see pro-cyclical factors at play that can continue to depress growth: (i) two-decade low in nominal GDP growth should drive across-the-board re-assessment of loan viability, further slowing loan growth; (ii) fiscal stress at the state and the central governments may force a spending slowdown, and if not, the hikes in GST rates currently being considered would play that role; (iii) both investment and consumption sentiments are weak.

“Worsening the structural constraint on financial system capacity are the mergers of large PSU banks, the increase in interest rates that the MPC’s [the Reserve Bank of India’s monetary policy committee] unexpected pause in rate cuts has triggered in the bond markets, continued sluggish rate transmission, and decisions by some state governments to re-open contracts awarded by their predecessor governments,” the trio noted further.

On the brighter side though, the Credit Suisse analysts are of the view that flows have and should hold up the market. “Flows into domestic mutual funds have slowed from the peak, but are stabilising at levels higher than seen historically,” they note. But, there are risks: weaker incomes as the economy slows can hurt savings; and returns on many systematic investment plans (SIPs) have been disappointing (many have been in small-/mid-cap funds; a Nifty SIP would have delivered solid returns, but a few of these are sold). “But as returns on fixed deposits have declined, MF distribution is expanding, and SIPs switch to large-/multi-cap funds that have done better, inflows should continue,” they said. “Global flows are likely to be supportive as well. Even one of easing global monetary conditions and/or lower global growth risk would suffice.”

Additionally, in the Credit Suisse analysts’ view, the policy interventions needed to get growth to rebound to 6.5% levels are not politically challenging, particularly once the de-stocking of the last year or so starts to reverse. “However, it is unclear at this stage when these actions may be taken—even though growth may recover a few quarters later, the market is likely to respond much faster.” The trio expects the headline indices to continue rising, as most of the market capitalisation is in stocks that are linked to rising penetration of products/formalisation (or changing dynamics in the telecom sector), market share gains (like in financial services), or global factors (which are more conducive now than a year ago). “Much of the earnings growth is also expected to be from these firms that are only indirectly affected by domestic macroeconomic factors,” they note.

According to their estimates, FY21 earnings per share (EPS) growth could still be reasonable at 12-14%, even though meaningfully below the current estimates of 28%. “Market performance in 2020 though would be affected by how FY22 EPS moves, we expect this, too, to settle at a low-to-mid-teens growth on the reduced FY21 base,” the trio adds, as they expect narrow market performance to continue for now, with economic uncertainty continues to push funds into the “safe” stocks.

Separately, in a December 16 report, a trio of UBS Securities India’s analysts led by Gautam Chhaochharia, highlighted that the support from local inflows has been key to Indian markets since FY16 in sustaining rich multiples against the backdrop of sustained earnings disappointments. However, net inflows into equity mutual funds for November 2019 were at $180 million the lowest in 41 months. “Lower or even negative returns in some cases are potentially leading to retail redemptions,” the trio noted. “SIP inflows at $1.2 billion remained at a peak, though this, too, has broadly stagnated over the past 12 months,” they added. According to the trio, 2019 has been more about FPI flows ($14.1 billion versus $6.6 billion by domestic institutional investors).

The UBS Securities’ analysts point out that they have been constructive over the past three months but after the recent rally, the Nifty is trading at 18.5 times one-year forward P/E multiple. “We believe the risk-reward is becoming less attractive in the near term,” they note. Their base-case target for the Nifty by June 2020 is 12,300, based on 18 times forward P/E multiple, with upside/downside scenarios at 13,300/ 10,300.

Clearly, the jury seems to be divided on the expectations for 2020, which leaves caution as the wise mantra for investors in the ensuing year.

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