What will drive markets in 2020? Find out here

The year 2019 saw record foreign inflows of over billion in Indian equities — the highest in five years.

By Urvashi Valecha and Yoosef KP

If the year 2019 was a tale of two halves, the New Year is unlikely to be any different. Just as the markets underperformed in the first half of this year and recovered after the corporate tax cuts in September, strategists expect the second half of 2020 to be better than the first half.

Markets could get a boost if the government’s divestment programme stays on course and the Union Budget gives a fillip to consumption through cuts in personal income tax rates. Credit Suisse in its India Market Strategy report for 2020 says, “In our view policy interventions to get a growth rebound to 6.5% are not politically challenging, but it is unclear when these actions may be taken.” It’s the anticipation of sops for individuals that could keep the market rallying till the Union Budget.

The market believes that privatisation of public sector enterprises is the need of the hour as gross tax revenues have been weak in the first half of FY20 and the cut in corporate taxes would further impact the collections in the second half of the financial year. Kotak Securities is of the view that the government can raise around Rs 80,000 crore from privatisation of the three listed companies (BPCL, ConCor and Shipping) and can mobilise up to Rs 1.4 lakh crore by selling its direct exposure in listed entities up to 51%.

Even if all the policy interventions that the markets expect from the Budget don’t play out, a combination of global factors are also expected to come together to support emerging market equities. The year 2019 saw record foreign inflows of over $14 billion in Indian equities — the highest in five years. The trend is expected to continue in 2020 as central banks across developed markets have adopted an accommodative policy stance to support slowing growth and are yet again infusing liquidity in the system through bond buying programmes.

This should support emerging market flows. Chandresh Nigam, MD and CEO, Axis Mutual Fund, is of the view that the appreciation of the dollar would plateau in 2020 and so, emerging markets could witness an increase in FPI inflows. “2020 is an election year (for the USA) so there are some chances of inflows coming in towards the second half of the year,” Nigam said.

Among emerging markets, India witnessed highest foreign inflows so far in 2019. Foreign portfolio investors (FPIs) pumped in $14.3 billion in India since January 2019 compared to nearly $9.8 billion inflows into Taiwan. While Indonesia saw an inflow of $ 3.4 billion, overseas investors bought equities worth $ 1.1 billion from South Korea.
In addition, the economic slowdown, which plagued the world in 2019, thanks to the trade tensions between China and the USA could ease in 2020. UBS Securities says: “A deal to reduce or remove existing tariffs and a pledge to stop adding more could dramatically reduce global economic uncertainty, unlock pent-up investment demand, and enable US President Donald Trump to ‘declare victory’ in an election year.”

Calendar 2019 saw extreme volatility in the markets as a combination of global and domestic factors impacted investments. The euphoria over the return of the Narendra Modi-led government was short-lived as it was followed by the Union Budget that saw the imposition of a tax surcharge, which spooked foreign portfolio investors. Weakening macro economic data further fuelled the rally in quality stocks. But the cut in corporate taxes and lending rates have paved the way for a better 2020.

For the last 10 years, emerging markets have underperformed the developed markets. But the tide could turn in favour of EMs if both global and domestic triggers are in place. HDFC Securities of the view that emerging markets as an asset class could start performing better over the next few years after underperforming over the past 10 years.

Even though corporate earnings have grown at an abysmal 6% CAGR over the last seven years, HDFC Securities expects India to benefit from demography, an aspirational middle class, and recent economic reforms that give it a constructive outlook over the coming decade.