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Remain cautious, avoid the noise and focus on fundamentals in 2020

As we go about building our investing framework for 2020 we stick to our traditional approach, remain cautious, avoid the noise and headlines and focus on fundamentals and value

December 29, 2019 / 08:25 AM IST

Rajmohan Krishnan

As we come to the end of 2019, we are faced with contrasting extremities.

The Nifty and Sensex are near its all-time highs even as the economic growth is at decadal lows. Inflation and global interest rates have seldom been lower, but Indian long-term interest rates continue to be stubbornly high.

A set of large caps and industry leaders are at all-time highs, while large parts of the stock market languish. In such a backdrop, how does one protect ones ‘capital? Where should one invest to maximise returns? These are questions on the minds of many investors, and one must admit these are indeed challenging times for those making investment decisions.

As we go about building our investing framework for 2020, we stick to our traditional approach, remain cautious, avoid the noise and headlines and focus on fundamentals and value.

Interest rates:

With inflation durably lower (we believe the latest uptick is but a blip in longer down trend) and growth falling off significantly, the stage is set for a meaningful decline in long term interest rates. Global interest rates being low is also supportive of this. While uncertainty over government finances remains the only thing stopping this decline in interest rates, one could argue that the force of the GDP growth deceleration could end up more over powering.

This could take two to three quarters to pan out. The durable reduction in rates, once they do transmit down to the end borrower, (be it for home loans, auto or commercial vehicle loans, infrastructure financial for the average SME), could finally lead to the restarting of a stalled investment recovery. Such an outcome would be favourable for investments in high-quality long-term bonds, which could well be one of the safer and more profitable investments in 2020.

GDP growth vs equity returns:

While all the noise seems to be around a deteriorating economic environment, one must not forget that stock markets are ultimately driven by earnings growth and current prices.

There are many sectors where prospects for earnings are at this juncture driven by factors other than near term GDP growth. The large banks, the telecom sector, utilities are all examples of this.

As the large banks emerge out of a decade of de-growth and high NPAs, the outlook for growth looks strong, especially those having robust current and savings account franchises.

The telecom sector has been consolidating over the last six to seven years, and there are but three players left. With Indian revenues per customer languishing at less than $2 per month (against international averages of between $8 and $39), telecom revenues and profits are expected to recover smartly, poor GDP growth notwithstanding. There are quite a few such examples, including utilities and some well run PSUs, which make us believe that overly focusing on macros could result in missed opportunities.

The past two years have seen very polarised performance, with the top 10-12 stocks contributing to a very large part of the up move in the headline indices, while a majority of stocks constituting these indices have delivered negative returns in the past couple of years.

The broader market (stocks outside the headline indices), have seen very significant under performance, and it is potentially in these waters that one might need to be fishing for opportunities in the coming year. Mid-caps and even more so small caps have seen very significant underperformance that makes many parts of this segment quite attractive.

Alternate opportunities to look out for:

While we are normally cautious about initial public offerings (IPOs), high quality IPOs in weak market conditions could well offer good long term investment opportunities. Buying into such opportunities pre-IPO could also deliver a rewarding experience. Impending REITs of government-owned toll assets and transmission assets have the potential to provide robust recurring long term yields, and deserve a closer look.

Gold continues to offer insurance value in an environment where are central banks across the globe have resorted to printing money. Venture funding is likely to slow a bit as investors tighten their deal evaluation processes, and increase focus on cash generation.

In summary, a disciplined and cautious approach is warranted. We should always remember that the assets delivered in the preceding few years are unlikely to be the ones to do so in the future and avoid focusing on past returns. Wishing everyone happy investing in 2020.

(The Author is Principal Founder, and Managing Director of Entrust Family Office.)

Disclaimer: The views and investment tips expressed by investment experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Dec 29, 2019 08:25 am