India, which was hailed as the world's fastest-growing major economy until recently, has been suffering a slowdown for the past few quarters as the GDP growth rate declined to a six-year low of 4.5 per cent in the September quarter of 2019-20 financial year. But, the Indian stock markets have bucked this depressing mood. The market benchmark Sensex roared upwards by over 16 per cent in the just concluded calendar year 2019. It doesn't take an analyst to figure out that 2019 was indeed a year of dissonance or decoupling with the Indian economy and Indian equity performance reflecting a clear disunion. The GDP clearly witnessed a slowdown in growth while the BSE Sensex and NSE Nifty were at the all time highs. Will this change in 2020? Will domestic stock markets and domestic economy at least pretend to be together as they move? The Finapolis looks at the possibilities.
Many investors have been guessing why the stock market is moving in the way it does. Does the Indian market have no linkage with the Indian economy? If they are inter-connected, then what explains the unlinked movement? The year 2019 was a year of extremes in more ways than one. The Indian economy wasn't doing well, but top companies showed resilience in terms of earnings. Even within equities, polarization was clearly visible with select large caps ruling the roost with the broader market witnessing a dry spell. It was as if the pessimism in markets was reserved for lesser mortals, while a chosen few would etch a different path for themselves.
In 2020, the economy is expected to turnaround, but the direction change is unlikely to be very sharp. "Going ahead, abundant monsoon towards later part of year should help economic recovery. Monsoon started late this year hurting growth. Consumption will get a boost with better winter crop. RBI has also been infusing liquidity in the market, which was a problem for much time after NBFC crisis. It is expected that housing sector also recovers with a number of measures taken. Corporate earnings should also pick up a lag. In near term, stock market performance is dependent on global liquidity, which remains very abundant as interest rates are falling. Any change in policy would impact stocks," says Atul Kumar, head-equities, Quantum Mutual Fund.
Infra sector - changing fortunes
Will the infrastructure sector hold the key to 2020 market and economic fortunes? The Government of India (GOI) has introduced a detailed roadmap for the Rs 100 trillion infrastructure investment over FY20-25. Over FY20-25E, the total capital expenditure for the infrastructure sector in India is estimated at Rs 102 trillion.
"According to government estimates, total spending over the past six years i.e. FY14-19E, stood at Rs 51 trillio. Of the estimated Rs 102 trillion investment, the center and the state governments are expected to finance 39 per cent each, while the private sector is expected to finance the remaining 22 per cent. During FY20-25E, 72 per cent of the estimated investment is expected in sectors that include Energy (24%), Urban Infrastructure (16%), Railways (13%) and Roads (19%)," reveals Motilal Oswal Research.
The key beneficiaries are expected to be Railways (13% v/s earlier 10%) and Urban Infrastructure (16% v/s earlier 13%). Focus should continue on Railways, Roads and Urban Infrastructure (led by metro projects), which were the key focus areas over the past 3-5 years.
While 42 per cent of the projects are under implementation stage currently, 19 per cent are under development stage, which provides better visibility to 60 per cent of the plan. However, of the remaining 40 per cent, 31 per cent projects are in conceptual stage whereas eight per cent are unclassified (majorly from the power sector). It is expected that projects of certain states, that are yet to communicate their pipelines would be added in due course.
As per Motilal Oswal Research report, key assumptions in the plan: (a) GDP growth estimate: Nominal GDP is estimated at 11.5 per cent CAGR over FY19-25E with FY25 nominal GDP growth expected at 13.1 per cent. (b) Capital outlay by the center is expected to witness 18.8 per cent CAGR over the same period; (c) Budgetary support is expected to witness 19.5 per cent CAGR over FY19-25E.
"This implies continued focus on infrastructure spending over the next five years with increasing budgetary support as per cent of GDP every year till FY25. While the plan talks about funding requirements, its success depends on the availability of funds, which may turn out to be the key limiting factor of such an ambitious plan," the brokerage said.
Stock markets had run up in 2019 expecting economic growth revival in 2020. If the economic growth indeed recovers, then markets will witness corporates posting solid earnings, which would after many years meet street expectations.
"We expect Nifty earnings to stage a smart recovery, growing at a CAGR of 18 per cent over FY19-21E. Outperformance in forward earnings (FY19-21E) is expected to be driven by the BFSI space amid stable asset quality and recovery of large stressed accounts. We value the Nifty at 13,150 i.e. 19.5 times FY21E EPS of Rs 675. The corresponding target for the BSE Sensex is at 43,000," says ICICI Securities, Retail Equity Research.
Indian nominal GDP growth has slowed down to seven per cent YoY in H1FY20 on the back of slower growth in investments (GFCF-up 4% YoY), while consumption continues to grow at steady pace (Private Consumption-up 7% YoY in H1FY20). The slowdown is largely due to:- i) moderation in capital outlay of all states (up only 7% YoY in FY20) following slower-than-expected GST collection and ii) change in guidelines of land acquisition towards road projects. On the positive side, the improvement in land acquisition progress in road sector indicate that tendering activity set to pick up in H2 FY20. Also, RBI survey of 1539 listed manufacturing companies shows there are signs of investment cycle picking up. The manufacturing firms have increased investments in fixed assets to 45.6 per cent of the funds available in H1FY20 v/s 18.9 per cent last year. Hence, we expect full-fledged revival in the economy (including investment) in FY21E.
Some green shoots are appearing. The government’s recent announcement to curtail corporate tax rate for new investment along with benign inflation and lower interest rate scenario could pave the way for a recovery in private investment in FY21E.
Year of midcaps and smallcaps?
While midcaps outperformed large caps significantly in FY15-18, it witnessed a reversal in trend amid liquidity issues along with IL&Fs crisis and other corporate defaults over the past 18 months. In turn, this skewed the investor’s focus towards quality companies with high governance standards and stable growth. Hence, only quality companies in both these indices have outperformed the market.
Going forward also, ICICI Securities believes the quality stock selection approach will continue to find favour rather than an index specific approach. The Nifty rallied 49 per cent in the past three years mainly backed by the strong performance of 16 stocks that rallied over 142 per cent during the same period. The rally in these stocks was mainly led by a strong operational performance backed by high governance standards during the same period.
Not everybody, but things look rosy for all. Adroit Portfolio Management Services says: "The liquidity-fueled global economic expansion looks tired. The deceleration that started in 2018, may not reverse in 2020. The deceleration in Indian economy may get arrested. But a broad based sustainable recovery is highly unlikely. The recovery may be shallow and limited to select pockets. The asset prices may remain under pressure. Overall equity returns to remain poor. Current bond yields to sustain. Rupee may weaken. Real estate prices may correct further. Corporate earnings to grow in single digits. Nifty returns may be + 8 per cent for the year. Equity risk reward clearly negative."
Coming to market movements in 2020, a lot depends on what foreigners do. The total market capitalisation (mcap) of the Indian equity market is around Rs154 lakh crore or $2.2 trillion. Foreign portfolio investors (FPIs) hold Rs 30 lakh crore or 20 per cent of the total market capitalisation while insurance companies hold Rs 10 lakh crore and mutual funds hold Rs 12 lakh crore. Domestic mutual funds have become significant market participants in the last few years. Their investment in the Indian market has increased significantly from Rs 2 lakh crore in December 2012 to Rs12 lakh crore in December 2019. Domestic insurance and mutual funds together hold 14 per cent of the Indian market capitalisation. Foreign investors or FPIs, however, still remain a dominant force in the Indian equity market.
Overall, more than 90-95 per cent of total FPI inflows can be attributed to actively managed funds while flows through passive ETFs are less than 5-10 per cent. However, ETF flows into EMs have seen consistent growth with the number of ETFs focused on EMs witnessing a growth of 25 per cent from 200 to 250 in the last one year, highest ever. Globally also, the trend of passive flows gaining traction is clearly visible with the asset under management in global ETFs now stands at $ 5.5 trillion. Indian markets accordingly are also likely to receive higher share of passive flows through both India dedicated or EM dedicated ETFs, going forward. Sectors like financials, energy, IT, consumer staples and consumer discretionary have higher weightages in most of these ETFs benchmark and are likely to receive bulk of these passive FPI flows, going forward.
The banking sector has been witnessing a revival in inflows. The same, along with 30 per cent weight in ETFs, is likely to attract major flows in the sector. Capital goods, oil & gas, and consumer durables have witnessed a trend reversal while FPIs have turned buyers in these sectors. NBFCs and telecom have just seen positive inflows after a continuous sell-off in the previous months. Consistent inflows were seen in the insurance and media space. Continuous selling was seen in technology, pharma and transportation sectors.
(The writer is a journalist with 14 years of experience)