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Growth pangs vs investment: 4 factors that are likely to chart market direction in 2020

Considering the growth slowdown, market leaders with healthy balance sheets and good free cash flow generation at the broader market level are better positioned to grow faster than the industry and the economy.

December 31, 2019 / 11:48 AM IST

Karthikraj Lakshmanan

We see that the earnings growth is likely to be more in the mid-teens for the Nifty50 index. Considering the growth slowdown, market leaders with healthy balance sheets and good free cash flow generation at the broader market level are better positioned to grow faster than the industry and the economy.

Earnings growth is more likely to pick-up towards the second half of 2020 as one sees the fruit of the recent steps taken by the Government and how some of the strategic divestments pan out to provide fiscal room.

Export-driven sectors could, meanwhile, see some improved outlook from the thawing of global trade tensions. While predicting markets for a small period like 1-Year has generally been tricky, but from a medium-term perspective say 3-5 years, the market returns historically (with some lead or lag) have mirrored earnings and cash flows which provides hope considering that earnings growth is picking up from mid-single-digit in last few years to mid-teens in next couple of years.

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Within that, the fact to remember is the market is not fully representative of the economy. There are many companies doing very well which are unlisted and similarly there are many companies/sectors which continue to grow their businesses reasonably well even in economy growth slowdown.

India has largely been a bottom-up market where the focus has to be on growth along with cash flow generation.

Domestic & global factors affecting the mutual fund sector in India:

We see financialisation of savings as an ongoing theme in India. Mutual funds provide a good cost-effective mode to save for retail investors through an institutional mechanism and using the expertise of professionals.

The household savings have moved more into financial assets from physical assets in the last few years. Within financial assets too, the average household has started to take more exposure into equity markets through Mutual Fund and especially through the SIP route.

The noteworthy factor is the SIP money continuing to flow through over the last 2 years despite tough market conditions. This shows that the money is more long-term oriented which is good for all – i.e. the investor, the MF industry and overall ecosystem.

From a global factor perspective, the easy monetary policy in developed markets has led to positive flows into emerging markets.

2018 was the year when excess liquidity in the global system was coming down which led to outflows from emerging markets including India.

Luckily in 2019, the developed market Central Banks' stance has become more dovish again with further liquidity infusion which seems to be finding its way into emerging markets as well.

Within Emerging markets, India is one of the fastest-growing markets amongst sizeable economies with the opportunity to participate in the growth story through quality companies run by professional management.

Investment philosophy for investors in the year 2020:

Our suggestion for investors for any year or period is to understand the risk and return profile of investment products that they partake in.

With that understanding, especially for first-time investors, if they are to look at equities, which is a product more for the longer term, they may consider coming through the SIP route (Systematic investment plan).

This works ideal, given valuations and flows are difficult to predict (as they are behavioural in nature); besides it also brings in an element of a disciplined investment approach which is important from a long term perspective.

Will global climate impact India?

On the global investment climate, US elections could have some bearing on the market in CY20. Besides, there are quite a few moving parts in the global economy both on the economy front as well as Geopolitical front which could add to volatility.

However, the market has largely factored in global risk factors including trade protectionism and there seems to be some balance developing. This will help improve the investment outlook for emerging markets, including India, in 2020.

Talking of global climate, we also note that Climate change is real and one needs to wake up to ESG as a theme.

At BNP, this is an integral part of our BMV philosophy now and we believe our understanding of this subject, through sharing of global best practices of our operations globally, is likely to keep us in good stead to do responsible investing and benefit out of the same.

Growth pangs for the Indian economy:

Following the recent announcements by the Government, the pickup from festive activity, our channel checks suggest that the negative feedback loop is arrested and the GDP print may have bottomed out in 2QFY20.

Looking into the next 12 months, we expect some more actions to follow in the upcoming budgets (both states and centre) and GST council meetings to kickstart the economy.

The recent thaw in global trade tensions also provides a reasonable tailwind for global economic activity and thereby India’s export engine.When looked at this with the country’s improving current account balance (the triple problems of crude, gold and consumer electronics seems to be much better vs 2013), we believe that any small boost to buoy consumption can, in turn, drive better capacity utilization and position for new capacity creation.

The de-stocking cycle also over a period is likely to give way to re-stocking when economic activity improves. What remains a risk to this thesis is the ongoing issues with weak NBFCs & Real estate sector besides a possible sharp spike in crude oil prices

(The author Senior Fund Manager – Equities, BNP Paribas Mutual Fund)

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Moneycontrol Contributor
first published: Dec 31, 2019 11:48 am

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