Mutual fund strategy 2020: Stock markets may see broad-based rally; here’s what investors may do

From the stock markets perspective, 2019 is a year that most investors would like to forget. The year started with a lot of hopes, it is an election year, but most of those hopes were dashed after an uninspiring budget and subsequently, the way GDP growth tanked. As a result of bad data from industry, inflation, GDP etc. the stock markets failed to recover at a broad-based level. The Sensex and Nifty, however, were completed disconnected with how most portfolios performed, thanks to a handful of 10-12 stocks that continue to defy gravity. There have been a lot of measures that both RBI and government have undertaken, but none of them have provided any respite till now. Having said that, both the govt as well as the RBI are aware of the seriousness and urgency and continue to take steps to restore the growth trajectory.

To look at the bright side, the Economy is “Still Growing”. I mean, it is not contracting. Only the growth has tapered from 7% to 4.5%. And so, the problem is not as endemic or unsolvable as a large section of the market believes.

There are enough tools in the hands of the government as well as Reserve Bank of India to spur demand, kick-start investments, and take the growth back to where it was. If in doubt, one just has to look at what happened in US and Europe between 2009-2012 to understand that if the governments decide, they can even tackle the worst recessions successfully. In India, we are only trying to restore growth and not a shrinking economy.

I feel that 2020, is likely to be a very big year from the market’s perspective.

There are multiple reasons for my thought.

First is the valuations. Barring a handful of stocks, the valuations have sobered across the board. Markets have been ruthless in punishing any stock where there was even a slight doubt on governance, liquidity, profitability etc. As a result, the valuation gap between large, mid and small caps is historically high. So, if mean reversion plays out, money should start flowing into some of these stocks that are fundamentally strong but are cheaply valued.

The easy monetary policy of RBI has led to surplus liquidity in the banking system. The RBI is also focusing on transmission of the Repo rate cuts of 135 bps this year, by using various strategies. Sooner or later, this should lead to growth in Credit, both retail and industrial credit.

Corporate Tax Cuts along with the easier lending environment should start private sector investments.

There is a likelihood that the government may tweak personal taxation in order to put more hands in the large middle class, which should spur the consumption demand. The government is also focusing on the most affected sectors – Real Estate and Auto. By giving short term sops and support, both these sectors should do much better than in 2019.

From the current account standpoint, RBI is sitting on a forex reserve of USD 450 billion. This should take care of the exchange rates and any trade deficit in the short run. With both monetary and fiscal policies working in unison to tackle growth, the results are bound to show up. Only the timing matters. Our sense is that we should start seeing improvement in numbers in the next 3-4 months gradually. And by the end of 2020, GDP growth should come back at least 6.5% levels.

In a scenario like this, we may see a broad-based rally in the markets. Expecting a growth of 30-40% in the next 2 years is not a big thing right now. In fact, there is a good possibility that this kind of returns can be experienced in just 2020.

(The author is MD, Ladderup. The views expressed are the author’s own)