'2020 will see a fresh bull cycle backed by normalised earnings'

 A) After a sharp rally during 2013-17, Indian equities have largely been in a consolidation mode over the last two calendar years.

After a small uptick in the calendar 2018, the Nifty closed with gains of 12 percent in 2019, but if one looks at the broad market, a large number of stocks are still trading way below the highs they made at the peak of 2017.

 We believe that 2020 would be a year of a breakout for Indian equities. Our base thesis of 2020 is that it would be a year of normalisation in Indian corporate earnings.

 Over the last few years, the Nifty earnings have grown at the rate of a mere 5 percent, but this poor earnings performance has been primarily due to various one-offs, while earnings till EBITDA level remained strong.

Remember, just for FY20, the Nifty EPS (earnings per share) growth is lower by 6 percent due to large one-off losses reported by Bharti and Yes Bank.

Now, most of those negative surprises in earnings appear to be behind us, so even in a challenging economic environment, the profit growth would be quite better next year helping the equity market to report better performance. 

Q) Do you have a Sensex or Nifty target for 2020? 

A) Our Nifty50 target for 2020 December is 13,800. We are expecting the Nifty companies to report 22 percent EPS growth in FY21. Our end-2020 target is based on 21 times FY21 expected EPS of Rs 657.

Q) What are your expectations from the budget? Will we see a personal tax cut? Will it give a boost to equity markets?

A) The risk to our base case thesis for the market rests entirely on the fiscal policies of the government and so the forthcoming budget is of vital importance.

Some relaxation on personal tax is expected and surely an immediate positive for consumption. But, more importantly, we require stability in the fiscal policy so that investors and businesses can take confident medium-term decisions. 

There has been a rampant flip-flop on tax rates, whether (it is) the direct taxes, GST rates or customs duties over the last few years. Also, the fiscal space is very limited while government spending is highly needed to spur investment activities in the economy.

So, how aggressively the government does divestment is of vital importance. If government borrowing sharply shoots up, then the chances of monetary easing will reduce, in turn reducing the valuation multiple in the equity market.

Q) Which are the sectors likely to hog the limelight in 2020 and why?

A) In line with our basic theme that 2020 will be a year of earnings normalisation of Indian corporates. We believe that 2020 will see the start of a fresh bull cycle.

Looking at the earning trajectory and valuation, we believe banks and consumer discretionary space would be the leader of the next bull-run.

Banks, both consumers-facing as well as corporate leaders, are already leading the recent rally in the market and they would continue to do so all through the next year. Going forward, stocks of consumer discretionary should start participating.  

Q) Any top 5 stocks that you think are available at attractive valuations and can be considered a buy on dips?

A) Among the sectors where we are overweight for 2020- banking and discretionary, we like HDFC Bank, ICICI Bank, SBI, Bajaj Auto, and United Spirits.

Q) What should be the investment philosophy for 2020?

A) In 2018 and 2019, ‘quality’ as investment philosophy has worked well for investors. Long-term moat companies with low but stable growth are best favoured in a flight-to-safety kind of investing environment.

Long-term good quality-stable growth companies if bought at a reasonable valuation should remain a core part of any prudent portfolio, but as the year 2020 will progress, adding some ‘growth’ stocks would be beneficial in a tactical sense. 

Q) Do you think growth bottomed out in the September quarter? And, will the small & midcaps outperform largecaps in 2020?

A) High-frequency data like auto numbers, industrial production, credit growth for October and November do not give confidence that the economy has turned up.

Though there are definitive signs of deceleration in the trend of slowing down. My sense is that the economy will be undergoing a bottoming out process over the next few quarters.

Small and mid-cap companies require a low-interest rate regime and a growing economy for sharp outperformance. The economy is still some quarters away from that sweet spot.

But, sharp valuation de-rating of mid and smallcap companies over the last two years will ensure that going forward mid and smallcap companies also perform in line with largecaps. And going forward once the economy picks up, these will start showing out-performance.  

Q) What are the key takeaways or lessons for investors from 2019?

A) A difficult period like the previous two years, 2018 and 2019, always teaches investors the importance of asset allocation. The first step that any investor should take while building an investment portfolio is deciding the right asset mix based on one’s risk profile and the investment objectives.

Then inside the allocation, one can take an aggressive approach like betting for best ideas for the short term. But the key is to largely remain diversified in an overall portfolio sense.

Also, deep research is needed while buying any individual security. Just looking at a short-term performance or few financial variables is dangerous, one needs to methodically understand the impact of macro changes, corporate governance issues, management strategies, and business models. 

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