Fiscal policy to drive growth and investment strategy
The decade commencing in 2010 was the immediate aftermath of the global financial crisis. Central banks had cut rates sharply and ensured that liquidity was abundant in the system. However, monetary stimulus appears to have substantially played out. With interest rates at multi-year lows in most economies, the scope for further rate cuts is limited. At the same time, the largest central banks have already built up a balance sheet in excess of $12 trillion, so aggressive liquidity infusion is also unlikely. That could mean a shift to fiscal policy.
One of the key drivers in the coming year will predicate on how the finance minister deals with fiscal issues like handling the fiscal deficit, personal taxation, GST rates, divestment strategy, infrastructure spending etc. Year 2020 will see a lot of investment themes like PSU plays, consumption plays and infra plays emerging from the fiscal policy theme. In fact, trying to correlate monetary policy with rate sensitives may not work.
Big names will get bigger in market capitalization
This is likely to play out at two levels. Year 2020 could reduce obsession with P/E ratios with general preference to stick to the tried and tested names. More investors will be willing to buy proven names at rich valuations than trying to dig for value. So the big guns like TCS, HDFC Bank and Reliance Industries may become more expensive and continue to attract investment demand. This trend will also play out at a group level. For example, the AMC business of an HDFC or SBI will attract better valuations compared to other listed AMCs in the market. We could see an expansion in the $50 billion and $100 billion club in 2020.
Financialization of savings could be a big theme this year
For over five years now, analysts have been talking about the financialization of savings as investors are increasingly moving their monies to mutual funds, insurance companies and wealth managers. That opens up a huge opportunity. In the last few years, we have seen a proliferation of such plays in the market. These financialization plays include mutual fund AMCs, life insurers, wealth management companies, equity brokers, investment boutiques, microfinance institutions, small finance banks, etc. These players could be a big opportunity in year 2020.
Low debt and sound corporate governance will be a lethal combination
One theme that is likely to continue into 2020 will be the natural preference for companies with low debt. The last two years have seen too many companies like IL&FS, Jet, DHFL and McLeod Russell buckling under the pressure of too much debt. With the money markets still very choosy about quality, low debt or at least limited maturity mismatch could continue to be the theme of 2020. Like low debt, corporate governance will be especially important for mid cap companies. In the last two years, we have seen large and mid-sized companies taking a hit on weak corporate governance. That trend is likely to continue in 2020.
Global macros will be the key driver of market direction
The global macros will continue to be the driver of market direction. Global cues like the progress on the trade deal between the US and China, US monetary policy, China’s industrial policy, geopolitical tensions in the Middle East and the progress on BREXIT will be important macros driving the market. Of course, the US elections could be the big story but that would be in the latter part of the year. But it will be macros that set the direction of market for traders and medium term investors.
ETFs and Passive theme could be big in 2020
With a market focused on macros and the large caps continuing to attract interest, ETFs could see a big push in the coming year. Over the last two years, nearly 75% of the active equity funds have struggled to outperform the indices, so you would have been better off in a passive fund like an ETF. That trend is expected to get substantially accentuated in the coming year. In fact, the rise of passive ETFs could be the big investment story of 2020.