(UPDATE: Between Jan 1 to Mar 5, the S&P BSE Sensex and Nifty 50 have lost over 2,835 points (-6.86%) and 913 points (-7.49%) respectively. While the Budget was a disappointment from the market standpoint, the black swan event which has marred the markets’ sentiment is the outbreak of the novel coronavirus. Almost all the correction in the indices can be attributed to the virus outbreak, as between Jan 21 and Mar 05, the Sensex and Nifty 50 have lost 2,853 points (-6.9%) and 900 points (-7.4%). Between the later dates, the Sensex has lost over ₹4,41,546 crore in market capitalisation.)

Last year ended on a mixed note for the markets. While the benchmark indices—the S&P BSE Sensex, the Nifty 50, and the S&P BSE 500—in absolute terms gained 13.79%, 11.53%, and 7.41%, respectively, the S&P BSE MidCap and S&P BSE SmallCap lost 2.97% and 7.57% during the year.

The benchmark indices may have been touching new highs, but not many portfolios were making money. “The peculiarity in the market has been the concentration of performance in select stocks and the big divergence in performance both within the Nifty 50, as well as compared to mid- and small-cap indices,” says Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.

He says the market has rewarded quality, growth, and steady business, irrespective of a company’s market capitalisation (m-cap). A major theme last year was corporate governance and companies which had good, clean managements were rewarded, he says, adding that the trend is unlikely to change in 2020.

Not just equities; the story of the debt market was hardly different. Even with a 135-basis point cut in policy rates by the Reserve Bank of India (RBI), the rate transmission has been muted. “Term premiums stayed elevated until the RBI intervened with ‘Operation Twist’, when it bought long-dated securities and sold short-dated ones,” says Navneet Munot, chief investment officer at SBI Mutual Fund, in his monthly view note for January.

According to him, a key factor for the disconnect between a struggling economy and the equity market has been the global reflation trade, with most global central banks, including the U.S. Fed, following expansionary monetary policies. “Second, stocks are forward-looking and are pricing in a likely economic recovery, aided by factors such as ample liquidity, local as well as global agri-inflation, along with good monsoons, and lagged impact of lower interest rates,” he adds. Third (and the most important factor in his view), is that the current economic crisis has set the tone for meaningful reforms and has raised expectations.

Rahul Singh, chief investment officer-equities at Tata Mutual Fund, agrees. Despite a general slowdown and sector-specific woes, the markets hit a high after the Narendra Modi-led government returned to power last May. The markets got a further boost in September when finance minister Nirmala Sitharaman, in a bid to spur growth and private investment, cut corporate tax to 22% from 30% for companies that don’t avail of any tax incentive. Since then, the government has taken a series of steps to infuse liquidity and ease stress in the real estate sector. “We expect more such measures in the coming weeks and months, as the recent flow of economic data is not suggesting any immediate recovery in economic activity,” Singh says.

Khemka believes that while the initiatives taken by the government and the RBI would take time to work on the ground, the long-term fundamentals of the Indian economy remain strong, with an expected gradual recovery in growth and domestic consumption. After the recent rally, he believes that the Nifty—at close to 18 times the priceto-earnings (P/E) ratio projected for FY21—captures the expected earnings recovery. “While the upside from the current levels may be capped, the current momentum can continue in the near term on the back of strong liquidity flows and positive sentiments,” he says. Beyond the blue chips, Khemka expects more traction for quality mid-caps, given their significant underperformance and discount to larger peers. The Nifty, he says, has given close to 12% returns in 2019 and touched new highs—even crossing the 12,000-mark—despite the weak macro environment and slower earnings growth. “We expect the market momentum to continue in 2020 on the back of global economic revival, earnings growth, liquidity, and any further announcements from the government to boost demand/consumption,” he says.

In 2020, large private banks, consumer and fastmoving consumer goods (FMCG) companies, and core sectors such as cement and capital goods would do well, Khemka says. For the banks, he expects their asset quality to normalise over the next two years. And with a revival in the economy, large private banks would be able to garner a larger chunk of the business. Consumer companies, he says, would be the largest beneficiaries of a revival in demand; and both cement and capital goods sectors are currently trading at a nearly 20 times discount to their 10-year average P/E, as the capex cycle is yet to pick up. “Once the measures adopted by the government start taking effect and the capex cycle revives, these sectors would be big gainers,” he says. The country’s under-penetrated insurance sector, he adds, could be another winner.

Positive cues ahead

Kotak Securities vice president Sumit Pokharna, in a note for the firm’s private client group, says that the markets’ high valuations are supported by low global and domestic bond yields, developments on the U.S.-China trade talks, improved earnings trajectory, and sustained global growth projections. Kotak Securities has put a one-year target of 45,500 and 13,400 on the BSE Sensex and Nifty 50, respectively, which work out to a near 10% upside from the early January levels. “We see valuations attractive in sectors like capital goods, utilities, oil and gas, construction, metals and mining, and auto ancillaries,” he notes. In his view, certain sectors with reasonable valuations such as agrochemicals, corporate banks, larger shadow banks, and mid-cap cement and pharma, could outperform in 2020 due to sector-specific reasons. In terms of m-cap, he prefers small-caps, because for the fourth time in the past 16 years, the Nifty small-cap index has come close to its previous lows in terms of relative underperformance to the Nifty 50.

Dhirendra Tiwari, head of research at Mumbai-based Antique Stock Broking, remains constructive on corporate-focussed banks (owing to a sharp decline in credit cost), capital goods (a proxy for the investment cycle), agrochemicals, select shadow banks (gold and commercial vehicle financing), and housing and its derivative sectors (like paints, consumer durables, and building material) due to government intervention to address housing market issues, greater credit flow, and a lower interest rate.

In a January 2 note, Tiwari and his two colleagues have upgraded their stance from ‘negative’ to ‘neutral’ on the energy sector (a beneficiary of the privatisation theme and with attractive valuations) and the metals sector (given that metal prices, particularly steel, have bottomed out and are showing signs of a recovery). The trio has a ‘neutral’ stance on pharma (reduced headwinds in the U.S. business due to higher pricing discipline) and FMCG (consumption slowdown and rich valuations), while their stance on the IT sector is negative due to concerns about global growth Tiwari and his colleagues believe disinvestment will be a relevant theme for 2020. India’s only credible disinvestment programme was seen during the NDA 1 government in 2002, “which led to significant value-unlocking in the PSU basket (outperforming the Sensex by nearly 70%)”, the trio note. Within the PSU basket, they believe defence and railways are not easy candidates, but opportunities exist in metals, and oil and gas.

Munot says that the return of commodity inflation could be a theme to watch out for in 2020. “In addition to accommodative central banks, fiscal policy is increasingly being used to revive growth globally,” he says. “As China stimulates its economy, along with good supply side discipline, there could be upside risks to commodities.” He bases his view on the following: the CRB commodity index, while up nearly 10% in 2019, at 186 levels is still significantly below the 2008 peak of 470; similarly, the FAO food price index was up about 10% last year at 177, but it was below the peak near 240 in 2011. While metal inventories are tight, gold has been inching up, he says, adding that Brent crude is up 22% for the year but at $66 was less than half of its $145 peak in 2008.

In Munot’s view, contrary to popular belief, a revival in inflation could help India as corporate performance has shown strong links with global inflation historically: better nominal growth helps through operating leverage as well as a reduced debt burden and quicker deleveraging. The latter should have a positive impact on the propensity of corporates to invest, Munot says. A rise in food inflation is positive for the rural economy, while rising inflation expectations can help spur consumer spending. “However, rising inflation makes the RBI’s job difficult, but given the slack in the economy and contained core inflation, monetary tightening may not be an immediate risk,” he adds.

Thanks to U.S.-China trade tensions, international equity markets were on tenterhooks in 2019, which offered gold as a safe haven to investors. The result: International gold prices gained 18.3% in 2019, its best annualised gains since 2010. Pokharna says the rally in gold was supported by multiple factors, including demand from global central banks which have been adding gold to their reserves, the U.S. Fed reducing interest rates, China’s concerns over a trade deal, and a softer dollar. Christopher Wood, global head of equity strategy at Jefferies, maintains a long-term bullish view on gold bullion, with the price target set at $4,200 per ounce.

“This is because the view here remains that central banks, including most importantly the Federal Reserve, will not be able to exit from unconventional monetary policy in a benign manner and will ultimately remain committed to ongoing balance sheet expansion in one form or another, just as the ECB renewed balance sheet expansion last quarter,” he notes in his early January Greed & Fear report. And, add the U.S.-Iran geopolitical gridlock and gold can be a renewed refuge area for 2020 if the situation goes out of hand.

This story was originally published in the February issue of the magazine.

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