Mayuresh Joshi
In calendar 2019, the Indian equity market delivered double-digit returns but the rally was highly polarised with a bias towards few stocks.
Banks had a stellar run delivering close to 19 percent, followed by financial services that delivered a 26 percent return, the energy pack was up 11.50 percent, and IT index closed with gains of about 9 percent.
But, the surprise outlier in spite of all the issues surrounding the sector was real estate which delivered an astounding 20 percent return for the calendar year.
The metals and the auto index lost close to 15 percent followed by the pharma sector (-9 percent), which was stifled by FDA concerns, pricing issues. The FMCG sector, on the other hand, had a flattish outing amid an economic slowdown.
Considering this backdrop, our hypothesis for the current year suggests Banks will continue to perform as a large part of the stress recognition is behind and credit offtake improves from the dismal 8 percent (Non-food credit growth). The better-run banks with sufficient capital adequacies shall have the advantage to drive home superior earnings reflected through return ratios.
We also expect a better rabi season and see rural consumption coming back to the fore in the next 2 quarters. Also, as urban consumption picks up consumer discretionary and staples shall come back in the limelight.
However, the next 2 quarters shall see moderate growth and pick-up is expected thereafter resulting in superior operating leverage and the price-volume dynamics shall reflect in superb earnings delivery.
Pharma which was beaten-down last year should show signs of a pickup as major issues are behind them.
We remain selective on the Auto/Auto ancillary and IT sectors and would prefer to stick with leaders as our methodology suggests that sticking with leaders would aid in mitigating your risk as they will be able to deliver in a tough macro environment.
Important factors to watch in the coming year which would chart market direction
The resolution in stages and the progress of the US-China trade deal, the manner and mechanism of the BREXIT process, Central bank actions across the globe which have largely been liquidity supportive on the global front.
Domestically, the key announcements in the Budget are likely to spur both consumption and investment growth.
Investment philosophy for investors in the year 2020
As we discussed earlier, we need to stick with the leaders in each of the sectors we like as strong earnings delivery, solid Institutional holding shall reflect in superior return ratios especially ROE's.
Also, leaders tend to outperform their peers on all these parameters and the same gets reflected in the average Relative Price Strength (RSI) of the leader being more than 87 and they tend to stay above the 50-DMA line on most occasions.
Laggards within the same peer group shall reflect poor earnings strength and price momentum and it is the perfect recipe for a lot of investors to get sucked into the value trap.
Again, ride with your winners for superior return delivery on your investments. So, in the absolute sense, it would be better to stay with the leaders for superior growth.
How the global climate will pan out, and in turn impact India
All the global macro factors including the progress on the US-China trade war, the BREXIT impact, Central Bank actions across the globe, the OPEC crude cuts and its impact on BRENT pricing and the general subdued global demand does have patchiness from a global GDP as well as earnings perspective.
The equity markets have largely gestated causing asset inflation but each of these factors shall have an impact as far as the risk-on factors for the equity markets is concerned.
Hence, volatility can be the name of the game at least for the first half of 2020. Liquidity shall continue to drive asset prices but any adverse reactions on any of the aforesaid factors shall have a quantum impact and a sudden rush towards dollar-denominated assets and some precious commodities as well.
Growth pangs for the Indian economy
The general slowdown has impacted consumption and investment but it is a matter of time before it recovers aided by several measures taken by the government.
GDP coming off, Inflation moving higher, Fiscal deficit under strain, Government CAPEX and borrowing remaining elevated are causes of concerns but they should start improving as we head into 2020.
With the RBI rate cuts and the transmission, more capital shall flow to all sectors of the economy. Also, inflation is expected to cool in the next few months and revenues, both Direct and Indirect, are expected to improve in the coming fiscal. The fiscal deficit should also be controlled.
So, we shall be heading into a year where macro factors shall improve compared to what we witnessed in 2019 and as markets are forward-looking they are taking into cognizance the improvement expected to come through.
(The author is Head of Equity - India, William O'Neil India)
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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