A Year To Forget, A Year To Look Forward To
While 2019 took away what investors love most, predictability, domestic investors could have an even bigger problem in 2020.
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us...
- Charles Dickens, A Tale of Two Cities
The way Indian markets have performed in 2019, it would be a year to forget for a clutch of investors, whether institutional or individual. But such years usually set the base for the year to come. And as we position ourselves at the beginning of 2020, it might work to pay heed to how Mr Market is treating certain asset and investing classes and how can one profit from that in 2020. From some investors’ perspective, 2019 gave a lot, and took away a lot. Another camp would argue that this happens every year. I would agree, with the latter, but not entirely. In that, last year brought back uncertainties—domestic and global—and took away the smoothly sloping mean reversion curve.
By doing that, the year took away what investors love most, predictability.
The powers that shape policies have done their bit in inducing this lack of predictability. If Indian investors rejoiced the re-election of a stable government, the enthusiasm was quickly doused by a lacklustre budget and in its wake a belief that gripped the market that the government leaned towards anti-capitalist. This took equity markets to the year’s lowest levels in August 2019.
A Taste Of Reform Leaves Investors Seeking More
Responding to the concerns, the Finance Minister began to announce a slew of measures, starting with the reversal of the tax on foreign portfolio investors, and culminating in the big announcement of the corporate tax cut.
However, the difficulty that this brings for 2020 is that hopes of further tax relaxations and rationalisations are high, while the government has very limited fiscal space to oblige.
Hence, for investors, a believable fiscal deficit number, GST collections, and divestment proceeds have all become highly important factors for 2020. The market may forgive some fiscal largesse if the spending is in order to revive the economy and if it is on the back of divestment and a pickup in tax revenue.
Despite the uncertainties of 2019, foreign investors pumped in the highest flows since 2014 in India. Having done that, this lot now finds itself in a quandary. India presents the option of multi-year growth in a large economy. But valuations are not that lucrative, and earnings growth isn’t quite as predicted, compared to some other Asian markets.
So do they wait for the growth print or keep buying in? Keep in mind, relative to the rest of the world, Indian earnings have already seen a sharp downgrade.
Will earnings growth return, as is hoped every year, or will 2020 be yet another year of disappointment?
Even as GDP growth numbers have been dispiriting, there is a possibility that earnings growth may stand in contrast, and in fact show signs of an up move relative to the last twelve months, aided by banks. This should help calm the heated price-versus-earnings argument. However, an illustrious set of experts have been proven wrong on earnings predictions, and I would hate to see one more name added to this list.
Domestic investors could have an even bigger problem in 2020.
Fund Managers In A Quandary
22 of the last 24 months have seen almost steady flows in domestic mutual fund schemes. That has enabled fund managers to take for granted the quantum of additional monthly flows and plan investments accordingly. But the last two months have seen a reversal of that predictability (except in SIPs). This presents a conundrum for the fund manager... to stay parked in the steady-state or hunt for value? The hunt for value hasn’t quite rewarded investors in 2019, and unfortunately for fund managers, long-term investments are measured quarterly or bi-annually, which makes their job tougher. Imagine a year where the index has given a 15 percent return, and midcaps are down 3 percent. In such a scenario, indices that often find broad skepticism, the likes of real estate, give a positive return of over 20 percent.
The standout factor in 2019, which might be the most important performance indicator in 2020 is the stark polarisation that we have witnessed in the market.
Despite the rally in some beaten-down names, the fact that the top 15 stocks in the Nifty account for over 60 percent of the weightage tells you that it is not just large caps versus midcaps, but favoured large caps versus out-of-favour largecaps as well.
The concern for some is that this is the new normal: that small is not beautiful, but that big is better. The other side of the spectrum has many experts too, including Ben Inker, who believes that we are painfully closer to the 1999 scenario where high valuations were assumed to be the norm, but eventually wasn’t. To a lot of portfolios, it will be mighty painful to see a reversal, but an opportunist would try and think about the opportunities which such a reversal would present.
A quick study of charts shows that the nearly 48 percent fall in the ratio of midcap index to large cap index is similar to the fall from the top in 2008. If markets follow historical patterns, we might we see the broader markets bounce back. And that might just bring cheer for the individual retail investor in India.
Here’s hoping for less Trump-led volatility, more pertinent government measures that help the economy, rational behaviour by individual investors aiding their long-term returns and more focus on economics as opposed to politics. Wishing everyone a splendid 2020!
Niraj Shah is Markets Editor at BloombergQuint.