Review of 2019
The year 2019 was anything but predictable due to a number of reasons on both domestic as well as global front. Firstly, on the global front, in the backdrop of 2018 where US Fed hiked interest rates and trade tensions escalated between US-China, the year 2019 was far better as continuous attempts were made to defuse the tensions. Further, citing weaker economic growth, the US Fed changed its stance and remained accommodative through the course of the year. This led to a buoyant mood in the global equity markets in which India too remained one of the key beneficiaries despite the number of domestic concerns.
The Indian markets too participated, however it grossly underperformed its peers due to decelerating domestic growth and a strong possibility of fiscal slippage this year. However, favourable election result, consistent rate cuts by the RBI and strong government measures to revive growth kept the domestic mood positive. The rally, however, was only restricted to select large-cap stocks that continued to outperform. In 2019, only 26% of BSE500 companies managed to outperform the benchmark, implying how narrow the market gains were. The silver lining in this rally was the renewed interest from FIIs that pumped in nearly Rs. 90,000 cr in 2019 as against being net sellers in the previous year.
Bond and Gold in 2019
The bond market did well in 2019, as domestic yields fell nearly got due to successive RBI rate cuts. This led to strong performance by debt mutual funds especially from long term bond funds through the course of the year. Further, the lower REPO rates led to a decline in Fixed Deposit rates from most banks. Coming to gold, after several years of underperformance, Gold was back with a bang as it yielded ~23.1% (highest amongst three asset classes) in INR terms. The gains were led by trade tensions between US-China, declining interest rates, and uncertainty over Brexit. Further, depreciation of Rupee also led to improved performance in 2019.
In our Samvat 2076 outlook, we had mentioned that constant efforts from the government and RBI to revive growth would start to reflect in the coming quarters. We reiterate our view on the markets and maintain our positive stance. Our view is based on the premise that growth would revive in the coming quarters and global economy would also begin its path to recovery led by easing trade tensions and US Fed accommodative stance. Having said that, it’s not going to be a smooth ride for the markets, as developments on several moving pieces would dictate the trend.
Some of the factors both on positive and negative factors include:
- Accommodative stance of central banks across the world
- Government is hell-bent to revive growth
- Renewed FII buying instils confidence on earnings recovery
- Strong FII inflows possible towards mid of the year due to change in norms
- Domestic flows continue to remain resilient led by SIP flows
- Easing trade tensions and reduced uncertainty over BREXIT
- Transmission of recent rate cut would spur consumption
- Election year in the US could lead to higher spending by the government
- Recent inflation spike looks temporary but could delay rate cuts further if it continues to remain sticky
- Fiscal Deficit is a big worry due to lower tax collections and the current need to expand spending to support growth
- The on-going rally is global in nature factoring in a positive outcome on trade deal between US-China. However, any deterioration of trade developments would be detrimental
- Recent sharp rally in select large caps limits the upside on markets and reduces the risk-reward ratios
At present, the positives outweigh the negative factors and therefore we maintain our positive stance. However, given the run-up, we would advise staying cautious at these levels as a lot of positives are already priced in. The prudent approach for fresh investment would be to wait for dips and accumulate stocks with strong growth potential and good corporate governance.
Bond & Gold Outlook
For the bond market, we believe that we are at the near end of rate cuts by the RBI and could see a prolonged pause until growth revives meaningfully. Therefore, returns on debt mutual funds would be stable and we do not expect runaway gains in 2020. Coming to gold, considering the current scenario wherein bond yields are low, geo-political tensions persist, and the possibility of currency depreciation, we expect gold to continue to do well in 2020. Investing on dips and small portfolio allocation would be a prudent approach.