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#39;2020 a year of consolidation, but might mark start of outperformance by midcap, smallcaps#39;

January 13
01:02 2020

Prasanna Pathak

As we enter the last year of the decade, it can be termed as a ‘lost’ one for India due to prolonged economic drift at a time of best demography (2010-20), soft crude oil prices and a benign global environment.

From a market standpoint, the last two years were extraordinary, in terms of disconnect between the economy and broader indices. However, on the other extreme, midcap and smallcap mayhem more than reflected the economic slump.

As we embark towards 2020, the domestic setup is poised interestingly as investors await a recovery in economy and corporate earnings in a backdrop of global liquidity and growth inching up and monetary push from many central banks.

Some of the current and future key events which are weighing on the markets can be ascribed to the economic growth worries, trade war outcome, Union Budget 2020, corporate earnings outlook and geopolitics.

The trade war seems to be structural and would be long drawn with intermittent flip-flops. It seems to be a reversal from globalisation, and it would have its share of impact on the global economy. This is precisely the reason why global leaders should try to find a logical balance between trade tariffs and slowdown/growth worries.

On economic worries, the government has announced slew of measures in an attempt to arrest economic slowdown that we believe will continue to take place, including during the Budget. However, the government has little room for any bold measures given the falling GST revenues and tax cuts announced.

The stock performance has been skewed over last 18-24 months as investors struck to quality stocks with growth visibility and strong cash-flows amid worries of over the NBFC crisis, a slowing economy and exports.

After muted earnings growth during FY17 to FY19 (6.7 percent CAGR in Nifty50), broader expectations are of high-double digit earnings growth for the next couple of years. A majority of this growth is expected from corporate banking space due to NPA issues receding, recovery from stressed accounts and growth uptick.

Other sectors that are interestingly poised are the metals, real estate, agro-based sectors and select infrastructure segments. The largecap versus midcap/smallcap conundrum is hard to decipher given the current imbalance in the flow of funds to certain category. However, given the prolonged underperformance of midcap/smallcap category, we expect that CY20 might mark the start of outperformance by midcap/smallcap stocks.

Valuations look optically stretched. However, high-double digit earnings growth, lower interest rates environment, easing liquidity scenario globally might keep it elevated for some time. We expect market to deliver returns in tandem with the earnings growth. We expect CY2020 to be a year of consolidation.

(The author is Head – Equity & Fund Manager at Taurus Mutual Fund)

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