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Will the market versus economy dichotomy continue in 2020?

As of December 24 close, Sensex is up 15 percent and Nifty has gained 12 percent in the calendar year 2019.

December 26, 2019 / 01:45 PM IST

One of the remarkable trend seen in the Indian market benchmarks in the calendar year 2019 was their all-time record rallies amid the weakness in the domestic economy.

India's growth slipped to multi-year low levels, consumer spending plunged sharply and inflation saw a gradual rise in the second half of the calendar year, but the equity benchmarks - Sensex and Nifty - endured all this to continue their upward march.

At this juncture, there is a fear that the market may not be able to sustain its gains for a long time and the market economy dichotomy may end soon.

Domestic brokerage firm Kotak Securities expects the economy-market divide to continue in 2020.

"It may continue in CY20 too. We rule out a quick recovery in the economy but expect the market to do relatively better due to likely strong earnings growth and possible favorable tax changes," said the brokerage in a report.


Kotak points out that the entire return in CY19 for the market has come post the corporate tax cut announcement in September 2019.

As of December 24 close, Sensex is up 15 percent and Nifty has gained 12 percent in the calendar year 2019.

This year’s rally has been driven by FPIs and is restricted to mainly large-cap stocks. The gains in the market came after the government jumped in to revive the confidence of the investors.

However, the rally in the market was confined to select stocks and the secondary indices did not witness the same optimism; midcaps and small-caps even slipped in the red hit by the gloomy macroeconomic environment.

The Indian market is underperforming major global peers as the worries of a slowdown in the domestic economy seems to have refused to fade away.

Experts are of the view that India's economic outlook for 2020 remains tepid. Rate cuts have not been as impactful as initially hoped, as banks are not passing the lower rate to consumers, and there are still challenges in reviving domestic consumption.

Kotak Securities does not see any case for a strong revival in GDP growth in FY21 given challenges to all the major components of GDP.

"Private consumption will take time to recover given challenges to household income growth, which in turn will depend on new investment and jobs; declining household savings rate for the past 6-7 years can only mean that income growth has failed to keep up with consumption growth," said the brokerage.

"Government consumption will likely decelerate from current high growth levels given fiscal challenges and investment will continue to be subdued due to income and balance sheet challenges of all the three major segments (government, household and private). We can hope for some recovery from the second half of CY20 supported by low base effect for private consumption," Kotak Securities said.

The gains of the market in FY21 is expected to be led by higher profits of financials and telecom companies.

"We expect net profits of the Nifty50 Index to grow 25 percent in FY2021 largely led by higher profits of financials; lower-loss provisions in the case of Axis Bank, ICICI Bank and State Bank of India, apart from growth in profits of others, lower losses or higher profits of the telecom companies and higher profits of global cyclical sectors and stocks," Kotak Securities said.

The market has high expectations of a reduction in personal income tax rate, removal of Dividend Distribution Tax (DDT) and rationalisation of long-term capital gains (LTCG) on equity funds the forthcoming FY21 Union Budget.

As per the brokerage firm Sharekhan by BNP Paribas, the equity market seems to be factoring in an improvement in macroeconomic conditions domestically. They are not assuming a big-bang recovery, but hoping the ‘worst is over’. In addition to accommodative monetary policy, the government is taking policy measures to address the issue, though the fiscal space to do so is getting quite limited.

"It remains to be seen if the government can meet the market’s expectations in light of its fiscal constraints. FY21 could be potentially more challenging as it may not have special dividends from the RBI and large privatization-related income," said Kotak Securities.

The global scenario also seems favourable for equities, given the interest rate cuts in the US and the resumption of quantitative easing in Europe. Finally, the US and China seem to be moving towards some kind of understanding on trade tariff-related issues.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Dec 26, 2019 01:45 pm

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