Play it by ear! India Strategy ! January, 2020

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Wish you and your family a happy new year. Hope you had a great time welcoming it.

2019 was a year of ‘divergence’ in many ways. While the economy decelerated considerably, equity markets did well even though corporate earnings fell short.

Further, even within equities, we saw a strong polarisation, with a preference for a few large corporate houses, whereas, broader markets didn’t do well. A similar trend of polarisation was witnessed in the debt space as well, as quality was preferred over anything which was non-AAA post the ILFS crisis.

It had been like a Bull market for Large Caps and Quality names but a bear market for the broader market. Ample liquidity and a dearth of investment opportunities were the key reasons for this selective risk-on behaviour. Sound Balance sheets and better earnings /cash flow visibility was rewarded handsomely.

In contrast to 2019, 2020 seems to be a year with a lot of promise for the broader market especially mid & small caps. However, a few key events such as the Union Budget, Earnings season (impact of Corporate tax cut), US- China trade truce agreement, Brexit and a build-up of US general election will have a major role to determine the further market direction. Hence we believe we must ‘Play it by ear’ in 2020, with heightened alertness.

The recent run-up has been very strong, taking the valuations closer to +2 standard deviation mark. With valuations once again hovering near its peak, we may see profit booking soon. We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 2-3 years.

As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

On the Fixed income front, yields are likely to trade within a range as conflicting forces are at play. On the positive side, factors such as moderation of global growth, easing stance of major global central banks, slowing domestic economic activities, RBI’s Accommodative stance, attractive term premium over repo rate due to Operation TWIST and moderating credit growth favour lower yields.

On the negative side, possible increase in the fiscal deficit due to corporate tax rate cuts, excess SLR (Statutory Liquidity Ratio) investments within the banking system, Higher food inflation, etc. might impact yields adversely. However, we believe that most of the aforesaid factors are largely priced in and scope of significant move on either side from here on seems limited.

With a lesser scope of a significant move in yields on either side, any exposure to debt markets should be taken through short term to medium term debt funds with a high-quality portfolio.

Gold has seen a significant run up as highlighted last year. Financial and geopolitical uncertainty combined with low interest rates globally will likely continue supporting gold investment demand. Therefore, we believe that the appeal of Gold is likely to remain elevated at least in the first half of 2020. Historically, dollar weakness is associated with commodity strength. Hence, we are closely watching the dollar movement in anticipation of a breakout in the commodity index.

To know more about our contrarian views and how it can benefit you, Please click here to read the report.

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