My Investment theme and view for 2020 is that the investors should rejig their long-term portfolios to benefit from the changing market dynamics with incremental weightage on quality midcaps. This is because, though the benchmark indices are at a new high, there is a clear divergence between the returns performance and valuation of 15 to 20 select few high-quality index stocks as against rest of the index companies as well as broader markets. I believe that the Reward-to-Risk Ratio is now tilted in favour of midcaps and smallcaps in 2020 as their valuations are at more than 20% to 50% discount vis-a-vis the large-caps. Thus, investors can start taking tranched positions in value stocks and select midcap companies that are a play on the revival in the economy and corporate earnings in the calendar year 2020.
I have, in the recent past, opined in my writings as well as in my media appearances, that the market rally is likely to become more broad based in the coming year and that the Indian stock markets are, therefore, on the verge of entering a very secular Bull phase with much wider participation coming in from high quality stocks belonging to the Mid-Cap and Small-Cap segment.
After reeling under investor apathy for almost two years, the midcap and smallcap stocks have begun 2020 on a strong note. So far this year, the mid-cap index has gained 7 per cent and the small-cap index has risen 9 per cent, while the Nifty has moved up a meagre 0.5 per cent. More than 350 stocks that comprise the BSE 500 index have outperformed the measure since the beginning of the year.
To give you a sense of “Value” in select midcaps and smallcaps, 12 stocks of the BSE Sensex or 40 percent of the stocks in the index are within 5 percent of the all the high level. As compared to this, 23 stocks or 22.7 percent of BSE Mid-Cap and 57 stocks or only 8.7 percent of BSE Small-Cap stocks are within 5 percent of their 52 week high levels.
Clearly, cheaper valuations of midcap and smallcap stocks and the sharp run-up in the bluechips are prompting a shift in allocations from largecap funds towards midcap and smallcap funds. Another important point that will drive these stocks is the constant fund flow. Domestic stocks will be driven largely by flows into mutual funds and the PMS industry. Huge positives from the Budget 2020 perspective, especially reduction in personal income tax, lowering of LTCG or DDT would act as triggers to spur a fresh rally in midcap and smallcap segment.
Other fundamental reasons for the micap and smallcap companies to do well, are due to smaller base effect and slower growth over the last few years, which will receive a huge fillip if the overall economic environment improves. Fundamental factors that will benefit the smaller companies are revival in economic growth, multiple government initiatives to boost demand, traction in the organized segment, premium product launches, lower raw material prices, transmission of lower interest rates and balance sheet strength. Besides, measures such as an incentive to real-estate and housing, corporate tax cuts, sanitation in rural areas, affordable housing, piped drinking water to all households by the year 2024 and rural electrification programme will also benefit midcap and small companies.
Thus, as was opined by me earlier, the corrections occurring in such Bull Markets should be utilized to buy Techno-Fundamentally sound stocks at lower levels.
Furthermore, if the Prime Minister’s vision of taking India on the path of becoming a $5 trillion economy starts taking a concrete shape, then the Indian Stock Markets will witness across the board participation & there would emerge a truly spectacular & SECULAR BULL MARKET, out-performing most of its global peers !!!
Dr. Amarjeet Singh
CAIA (USA), MCSI (UK), CMT (USA)
As was opined by me last month, we are in a strong Bull Market which seems to be steadily turning into a secular one.
Hence corrections occurring in such Bull Markets, particularly the kinds which are being witnessed now, should be utilized to buy Techno-Fundamentally sound stocks at lower levels.
In fact, the geo-political tension in the Middle-East region due to the US-Iran conflict as well as the weak economic data pouring in at the domestic front has offered this buying opportunity.
The likelihood of the US-Iran conflict escalating into full-fledged war seems to be quite low.
Also at the domestic front, the government is likely to turn more proactive in the ensuing Budget to revive the sagging economy and is likely to announce more stimulus packages to do this.
CAIA (USA), MCSI (UK), CMT (USA)
Markets at a New High!
Continuing its record run, the stock markets surged to an all-time high last week with the Sensex and Nifty hitting record highs on 29th December, 2019.
I had specifically mentioned in my writings dated 16th Dec. 2019 that,�The market is very likely to cross its all-time high�.
The Global markets have been witnessing a very strong rally, particularly US, Europe & Asia. On Thursday, Nasdaq crossed the 9,000 levels for first time ever and the S&P 500 also hit a fresh record high, boosted by optimism over US-China trade pact and gains in the shares of Amazon as a result of robust online holiday sales.
The markets are now very likely to witness a strong further upside momentum as, technically speaking, we are in an altogether new and unchartered territory on the Sensex & Nifty charts. I reiterate my stance that any correction occurring in the markets should be utilized as an opportunity to buy Techno-Fundamentally sound stocks at lower levels.
Thus, positive sentiment is likely to continue in the market on the back of global cues and on the ensuing Budget raising hopes for further stimulus to spur economic growth.
Foreign investors have already pumped in more than Rs. 1 lakh crore into Indian equities in 2019, making it the best year for overseas investments in India since 2013, which is the second highest amount received after China in the Asian region.
This flow of foreign funds is very likely to continue in the New Year too, as India happens to be one of the most preferred investment destinations among emerging markets for 2020.
Furthermore, the appetite for Indian equities is also growing amongst investors from the middle weight developing economies such as Norway, Canada, Netherlands etc. which have many burgeoning middle weight cities.The assets under management of investors from these countries grew by 15% to 18%. It is interesting to note that Norway's AUM growth in India was the highest at 27% in the first 11 months of the current year, amongst the middle weight developing economies.
Narrow Rally - A Cause of Concern :
However, the biggest cause of concern has been a total lack of market breadth, wherein just a handful of large-cap stocks have participated in the up-move. Hence the current rally has been very narrow similar to the ones which we have been witnessing since January 2018, the time when the Long-Term Capital Gains (LTCG) Tax was imposed during Budget 2018. The broader markets have been struggling particularly since January 2018.
The broader Indices are still far away from their January 2018 highs. Infact, the Mid-Cap and the Small-Cap indices are down nearly 19% and 33% from their all-time highs of January 2018, respectively, whereas the Sensex and the Nifty50 indices are up by around 14% and 9% respectively, during the same period. The portfolios of most investors are in the red as we have seen more wealth destruction than wealth creation during the year 2018 & 2019. More than 300 stocks out of BSE500 have given negative returns.
THE SCHISM : Markets at a High, but Economy in Doldrums !
Furthermore, most investors, market participants and even many experts are baffled due to the fact that although the benchmark Indices are scaling new peaks but the economy appears to be in doldrums with the GDP touching a 26-quarter low of 4.5% in September 2019 as well as the Index of Industrial Production (IIP) contracting for third consecutive time in October 2019.
I would now like to give my views and a plausible explanation for this dichotomy. . The markets and the economy do move in similar directions during normal conditions. However, at crucial and critical junctures or turning points, the markets and the economy can move in different directions.This is primarily because the markets are often forward looking and also take into account the lag effect. Hence, bad news tends to get discounted early and quickly and gets reflected in the stock price movement. This often remains a big puzzle to not only people who are outside the market ecosystem, but also for many of those who are market participants as well as market experts. They get convinced only when the good economic data starts pouring in publicly, by which time the markets would have already had a significant run. One should not forget that the best of the Bull Markets are born during the most pessimistic times.
There is, thus, a very high probability that Indian stock markets are on the verge of entering a very secular Bull Phase with much wider participation coming in from high quality stocks from the Mid-Cap and Small-Cap segment who might have the potential to turn out into tomorrow's Large-Caps.
In 2020, we are likely to see the positive results of the steps which the government has been taking to lift the economy. It has already slashed corporate tax for all companies to levels which are quite on par with other economies, has scrapped plans to impose tax on overseas investors, have announced a Rs. 25,000 crore fund to complete Real Estate projects stuck for want of cash etc.
This majorly explains as to why the Stock Markets rose inspite of the second quarter GDP report showing a meagre 4.5% growth rate, although, the markets had reacted sharply on the downside when the GDP figures of 5% were released for the first quarter ended June 2019. A lot many positive announcements were made by the government during the period between the release of first quarter and the second quarter GDP figures.
The markets are also pinning great hopes on the Prime Minister's vision and determination of making India a $5 trillion economy which is likely to spur humongous growth in the economy.
WHAT NEXT IN 2020 ?
In the coming year, the market momentum is likely to become more stronger due to better inflow of foreign funds coupled with government stimulus measures continuing. The FDI flow is also likely to increase in 2020. These strategic investors are quite bullish as regards the economic growth picking up in India in 2020. This is likely to further boost market sentiment. In the coming year, it is also very likely that whatever measures have been undertaken by the government in the recent past would start yielding the desired results. Furthermore, investors are also expecting more positive announcements in the upcoming Union Budget which could further boost market sentiments. The 2020 Budget will, therefore, be very crucial in setting up the tone for the next phase of economic reforms. Rationalization of individual income tax slab, a thrust to exports and a further push to infrastructure development would be the key areas to watch for in the coming budget.
Thus in all probability, the market rally is likely to become more broad based in the coming year. A lot many stocks are still available at reasonably good valuations. Many PSU stocks very well fit into this value criteria. I had, therefore, recommended some very sound PSU stocks which are available at reasonable valuations, in my writings dated 12 December 2019. The success of the recently concluded Bharat Bond ETF, which garned Rs.12000 crores, is also a big positive for PSU stocks as this amount can be utilized by such PSU's for their expansion plans.
Hence, investors need to focus on companies following good corporate governance practices as well as having strong fundamental track record and available at reasonably attractive valuations.The Indian stock markets are, therefore, very likely on the verge of entering a very secular Bull phase with much wider participation coming in from high quality stocks belonging to the Mid-Cap and Small-Cap segment.
Today is likely to be the first Up-Day for both Nifty as well as Bank Nifty after a continuos decline which was witnessed since 29th November. Yesterday a sharp bounce back occurred in the last half an hour of the trading session and many stocks formed a Hammer as well as a Dragon-Fly Doji on the Candlestick Charts. It seems that once again the intermediate trend of both Nifty & Bank Nifty has turned up & the market is likely to resume its upward journey with renewed vigour.
Stocks which are likely to show a good upward momentum are Ashok Leyland, BPCL, Hero Motocorp, Hindalco, M&M Ltd., NMDC, NTPC, Petronet, Power Grid & Tata Motors.