Stock Market

Precision eye for value-price-quality tradeoff will be vital in your 2020 play

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Crystal gazing 2020 is going to be a difficult task.

That’s because the signals from 2019 have been multiple and mixed.

On one hand, we had a good monsoon, accommodative monetary policy and revival in GST collection in November 2019 and December 2019, indicating an uptick in consumption.

On the other hand, the GDP growth slowdown, de-growth in manufacturing sector and the investment-consumption slowdown have become major causes of concern for the economy. These mixed signals had a bearing on the stock market.

Select largecap companies have seen their prices rally on account of passive fund flows over the past three years.

This has caused valuations of these companies to shoot up significantly, with many of them now trading at around 15-20 per cent above their historical valuations. On the other hand, the rest of the largecap space has mostly remained rangebound, with valuations near historical averages.

But the real pain has been in the midcap and smallcap space.

Most midcaps are trading around 15-20 per cent below the levels seen in January 2018.

In the smallcap space, prices have fallen around 40 per cent from their January 2018 levels. Economic growth in Calendar 2020 may depend on how soon can the credit flow be revived to the commercial sector. RBI’s own estimate shows credit flow has fallen by 88 per cent during the April-October 2019 period to Rs 90,995 crore from Rs 7.36 lakh crore in April-October, 2018.

With such drastic credit squeeze, companies will find it difficult to survive and grow.

Due to this squeeze, it is estimated that corporates may be paying as high as 5 per cent real interest rate for their funding requirements. RBI clearly is aware of this problem.

It has launched its own version of Operation Twist in the domestic bond market to address this.

Under this arrangement, RBI sells short-term bills and buys long-term sovereign.

This will help bring down long-term bond yields, flatten the curve and improve monetary policy transmission in the system. Over time, this will help reduce long-term borrowing cost for the government and private players, and improve growth prospects. Among the additional factors that markets will watch out keenly in the coming year are a possible offshore sovereign bond issuance and the likely inclusion of India in the global bond index.

These two events can provide India access to cheaper long-term offshore capital inflows. Other than that, meaningful strategic divestment of PSUs too can help improve productivity and the fiscal situation.

The direction of fiscal deficit and monetary policy will also be a key guidance for market sentiment in the coming year. We may see credit flow pick up by H1 of 2020.

Recapitalisation of PSU banks, improving corporate governance standards and professionalisation of public sector lenders may work together to help stimulate credit offtake.

Other than that, the positive impact from the securitisation of NBFCs and from the real estate bailout package on the economy also remain to be seen. From the equity market’s point of view, Calendar 2020 may provide bottom-up stock-picking opportunities for fund managers.

Good quality stocks are not cheap at this point, and cheaper stocks are not necessarily of good quality.

In such a market, precision eye for value-price-quality tradeoff will be vital. For us, good businesses at good price with good managers will be our investment approach to stocks in the coming year, as it has always been.

Asset allocation strategy will continue to be a critical element to tide the volatility in the year ahead. Given the current levels of market valuations, investors may consider SIP/STP in smallcap and midcap funds with a 3-5 year horizon.

Investors unsure of the market risks and potentials, may choose to invest in balanced advantage funds for investing purposes. Finally, the mutual fund industry’s average AUM (Sept-Dec 19) has grown by 13.3 per cent year on year to Rs 26.7 lakh crore.

In the same period, Kotak Mutual fund saw its AUM grow by around 27 per cent year on year to Rs 1.76 lakh crore.

We will continue to strive for the financial prosperity of our investors and distributors. Wishing You A Happy New Year!




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