Why 2020 could prove to be a much better year for broader markets
2019 could be best described as a washout for Indian equity market investors. Barring a few bluechip names where institutional ownership is much greater than retail, there were not many stocks that gave positive returns in 2019, let alone beating inflation. Decline in stocks such as DHFL, Yes Bank, Indiabulls Housing Finance and other widely owned stocks meant that investor wealth in lakhs of crores was lost in the markets.
This could be about to reverse very soon and here are the reasons to think so:
- Data, data and data: The Purchasing Managers’ Index (PMI) rose at the “joint-strongest” rate in 10 months at 52.7 in December 2019, as new orders rose at the fastest pace since July, with companies ramping up production and resuming hiring efforts. This marks three straight months of increase in PMI numbers. This, coupled with higher profit growth in FMCG, Financials, Pharma and Retail sectors in Q2FY20 as compared to Q1FY20, raises hopes of an economic recovery.
- Stable Macros: No matter how many newspapers and business news channels cry hoarse about doomsday for the Indian economy, the truth is that our macros are really strong and stable. Forex reserves are at an all time high, inflation is well under control and Rupee has managed to buck the slide of other emerging market currencies against the dollar. Oil prices, which have been fairly benign until recently, could be one area of concern as the US-Iran tensions reach a dangerous cacophony.
- Policy measures: Curse them as much as you like but this govt has actually taken two of the most reformative measures in Corporate tax cut and setting up the IBC process. For the first time in modern India, businessmen are actually scared of losing their business if they fail to repay the money owed to creditors. Case in point being the Essar Steel resolution. You talk to anyone who has watched the Indian industry long enough and they’ll tell you that it was unimaginable until very recently that the big industrialists could be forced to give up their business. It might lead to lower credit growth in the medium term but it’ll also save us a lot of stress in terms of NPAs and bank bailouts. Similarly, benefits of the corporate tax cut in terms of competitiveness are likely to accrue huge dividends in the years to come. At the same time we finally have an RBI that is awake to the growth problem and not hesitant to cut interest rates to spur growth.
- Geopolitics: The US-China trade dispute has led to a lot of global uncertainty but with the Phase 1 trade deal set to be signed, there seems to be some relief on the horizon. As companies seek to diversify outside China, India could attract a lot of those businesses as we have a lot of local demand and low cost labour to help sustain those factories. Further, Modi’s active international diplomacy is likely to bring incremental FII flows into the country.
- Money flows: In October 2017, SEBI classified stocks as per their market caps and mandated mutual funds to buy them only based on the scheme’s category. This led to rejigging of mutual fund portfolios and the net result was that there was too much money chasing too few stocks. As a result, the broader market was starved of flows and even the good mid/ small cap stocks got hammered. Now that is set to change as SEBI is doing a rethink on the existing classification to broaden the scope and give the fund managers more space to exercise discretion.
There are other notable factors that are also likely to show incremental improvement in 2020 and beyond. GST is a huge reform that is likely to stabilise further with time and unravel its true potential. Rationalisation and simplification of personal income tax rates is likely to spur individual spending and boost the economy. Housing for all scheme will boost the real estate sector that has gone through its worst period in the last 4–5 years.
2019 will be remembered as the year of consolidation in the country as the way of doing business undergoes a fundamental change. Sustained attacks on crony capitalism of yore has brought about this shift where the declared profit will be closer to actual profit and loans taken from banks will be employed in the business instead of promoter’s homes.