Crystal gaze into 2020 and stock markets are interestingly poised! The Nifty at above 12,300 and Sensex just shy of 42,000 are near all-time highs. We enter 2020 on the back of a robust 14% return on indices in 2019. What does the market hold for 2020 and what would be the preconditions for the rally? Will the rally be focused on large caps or mid caps? Above all, what is the extra push needed from the government?
Will Kurtosis continue?
The one word in market forecasts last year was Kurtosis, which refers to how concentrated the data was. The 2019 rally was limited to 8-10 stocks within the large caps. The Sensex returned around 14% (excluding dividends) for the year 2019. If you removed HDFC Bank, HDFC, TCS, Infosys, Reliance, Hindustan Unilever, ICICI Bank and Kotak Bank, then the Sensex returns would have actually been negative. Since most of the action happened in the heavyweights, the impact was visible on the Sensex. But, can this continue? It can work both ways. Technically, it may not be sustainable but if you look at the US markets, five stocks (Microsoft, Amazon, Apple, Facebook and Alphabet) accounted for most of the returns in the last one year. Kurtosis could be a reality in 2020 too.
Will the Sensex touch 50,000 in 2020?
The answer to this question would depend on the answer to the previous question on kurtosis. For the Sensex to touch 50,000 in 2020, heavyweights must drive the markets higher. It looks very unlikely that there could be any serious sector rotation. But touching 50,000 this year would require the Sensex to appreciate by 20% this year. Last year, with a high level of kurtosis, the Sensex saw 14% returns on a lower base. Sensex 50,000 could be possible only if aggressive fiscal policy and revival in demand also add up.
Will year 2020 belong to mid caps?
After 2 years of mid cap underperformance, pockets of value are emerging. However, any outright rally in mid caps looks difficult without major policy shifts or sharp fall in oil prices. Of course, mid caps will provide opportunities and are likely to perform better than the last two years. The weak hands have been weeded out and the balance sheets are a lot more stable now. However, any runaway rally in midcaps like the 2014-17 periods is ruled out. For that inflation, interest rates and oil prices will have to be much lower. But surely, we can hope for pockets of outperformance in mid caps in 2020.
Will demand revival be seen in year 2020?
That is the million dollar question. Demand revival happens when jobs get created and there is a massive combination of fiscal stimulus and capital investments. The last year saw a major demand compression across sectors due to caution. The onus is on the government to built business confidence and consumer confidence. In fact, a revival in demand could also end up justifying a rally in stocks. However, that looks some time away and the government needs to first stave off the stagflation threat.
Will we see a shift to fiscal policy measures?
That shift could get more acute in the year 2020. With 135bps rate cut in 2019 and rates close to 16 year lows, potential for rate cuts is limited. The focus will have to be on tax incentives for corporates and individuals as well as incentives for capital investments. A big focus on public spending and infrastructure creation could be a double boost for markets in 2020. To answer the question, the policy shift towards fiscal measures will sharpen in 2020.
Will FPI flows continue into India?
Year 2019 saw substantial FPI inflows in contrast to the record selling in 2018. Year 2020 could see positive flows into equities although debt could be the question mark. With inflation at 7.35% for December and negative real yields, only the strong INR is holding FPIs to rupee debt. If the rupee were to weaken at some point in 2020, then we could see a deluge of outflows from debt. That could be a worry point for the markets.
Markets in 2020 are unlikely to be very different from 2019. However, markets will be a lot more comfortable, if a revival in demand can ratify the confidence of investors.