The year 2019 has been anything but predictable as number events took centre stage both on the domestic as well global front. The US-China trade war, uncertainty over Brexit, general elections in India all had a bearing on the Indian markets. Therefore, in this article, we look at what are the key lessons to be learnt from the markets in 2019.
Markets can stay irrational for a long time
If one would have asked where the markets should be, especially after GDP growth is at a six-year low, and then the probable answer from every analyst would be lower by 10-15% at least from its highs. However, here we are with both the benchmark indices trading at all-time highs. There are of course valid reasons behind it as some large heavyweights remained unaffected by the slowdown and continued to grow at a healthy pace. But let’s not forget the rally is global in nature. And if this would not have been the case, the markets would have been easily down by over 10%. Therefore, the high connectedness between global equity markets has kept the mood buoyant. This sort of behaviour is irrational. This is because ideally stock markets usually reflect or foresee the economic state which has not been the case for the last two years.
Economy over politics
As much as the markets like political stability, the economy precedes politics in the medium term. Political stability is important for any country as it speeds up the reform implementation. However, in the past, coalition governments have also done well. Coming to 2019 wherein the incumbent government registered a thumping victory surpassing all poll estimates. This led to a sharp rally in the Indian equity markets. However, the rally soon fizzled as the economy struggled, leading to sell-off in the Indian markets.
Growth stocks are where you hide
In a scenario where equity markets are refraining to fall, the only place to hide for an equity investor is into growth stocks. In 2019, only 26% of the stocks from BSE500 managed to outperform the index. And most of these names have delivered healthy growth despite the slowdown. We had mentioned this in our earlier article on why do growth stocks do well and should you hold on to it at current levels? Read more to find out.
Beware of Promoter Pledge
In a decelerating economic growth scenario, the issue of promoter pledge aggravates as ideally promoters pledge shares of one of its good companies and invest/repay debt in its other already distressed companies. We have seen the result as some of the most prominent names got beaten down badly in 2019 due to high promoter pledge. Therefore, promoter pledging is always an issue if its high and frequent (over 40% of its holding) but it can be way worse in a declining growth rate scenario.
Do not rule out Gold as an investment
If you recall many advisors had ruled out gold as an investment especially in 2016 and 2017. This was due to its lacklustre returns and was only recommended to highly conservative investors. However in 2019, even though equity assets have performed reasonably well, gold is not far behind. In fact, in INR terms, Gold has beaten equity indices yielding more than 20% returns in 2019 itself. Therefore, one of the key lessons here is to always keep certain parts of your asset into gold as it acts as a natural hedge against any unforeseen circumstances.
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