US Economy: The US Federal Reserve (Fed) kept interest rates unchanged at 1.5-1.75% and signaled keeping them steady through 2020. Meanwhile, the US gross domestic product (GDP) advanced 2.1% on-year in the third quarter (Q3) of 2019 compared with 2% growth in Q2 2019.
Eurozone: The European Central Bank (ECB) kept its main refinancing rate unchanged at a record low 0%, the deposit rate at -0.50% and the marginal lending rate at 0.25% under its newly appointed president, Christine Lagarde. In her first press conference, Lagarde stated the central bank would continue with the “highly accommodative” monetary policy to boost inflation.
UK: The Bank of England (BoE) kept its interest rate unchanged at 0.75% in a split vote as two members sought a 25 basis point rate cut. The UK economy stagnated in October, marking three straight months without growth for the first time since 2009.
Japan: Japan’s cabinet has approved a $122 billion fiscal package to support stalling growth. the Bank of Japan (BoJ) policy board voted 7-2 to retain the interest rate at -0.1% on current accounts. The economy grew at an annualized rate of 1.8% in the in the third quarter compared to 2.0% growth in the second quarter.
Index Performance: Indian equity indices ended 2019 on a positive note with benchmarks S&P BSE Sensex and Nifty 50 rose 1.13% and 0.93%, respectively in December 2019.
Inflation: Retail inflation based on the consumer price index (CPI) breached the Reserve Bank of India’s (RBI) medium-term target of 4% for the second consecutive month this fiscal, surging to a 40-month high of 5.54% in November 2019 owing to rising food prices.
Tailwinds: Government’s release of Rs 86.55 billion to certain banks for preferential allotment of shares, hopes of more reform measures by the government in the upcoming Budget, and sustained inflows from the foreign institutional investors (FIIs) augured well for the local indices.
- Reserve Bank of India (RBI) unexpectedly kept the repo rate unchanged at 5.15% and lowered the gross domestic product (GDP) forecast to 5% for fiscal 2020.
- The sentiment was dented further after the global agencies, such as Moody’s Investors Service and Fitch Ratings, cut India’s GDP growth projection for fiscal 2020.
- A spike in the domestic retail inflation and weak industrial output data pulled down the indices further.
- Reports that the government might miss its divestment target for the current fiscal and profit booking impacted the benchmark indices.
- DIIs and volatility amid the expiry of the December futures and options contracts weighed on the benchmarks.
Tailwinds: The market rose sharply in reaction to firm global cues in form of the announcement of a preliminary trade deal between the US and China.
Headwinds: US plans to restore tariffs on steel imported from Brazil and Argentina, as well as a few weak economic cues from US. Sectoral Impact: S&P BSE sectoral indices ended mixed in December 2019. Metal stocks shined amid positive global sentiment. S&P BSE Metal was the top gainer, surging nearly 7%. Buying interest in realty and information technology (IT) counters supported the upward trajectory. The S&P BSE Realty index and S&P BSE IT index rose 5.26% and 4.04%. Auto stocks rallied owing to stock specific developments; S&P BSE Auto index gained 2%. Selling pressure was seen in oil and gas stocks and defensive counters, such as healthcare and FMCG. S&P BSE Oil and gas index (top sectoral loser), S&P BSE Healthcare index and S&P BSE FMCG index fell 2.71%, 2.71% and 2.53%, respectively.
Outlook & Triggers
2019 was a year where we saw economy slowing down significantly. However, the same was not reflected in the Equity Market performance which posted robust gains of 14% (S&P BSE Sensex Index). Compared to the other markets in 2019, India (MSCI India Index) underperformed its Emerging Market (EM) peers (MSCI EM Index). The outperformance of Emerging Markets can be attributed to the synchronized easing stance adopted by various global central banks which helped in increasing the overall risk capital. In 2019, we also saw many of the longer sovereign yields drifting towards the negative territory, which raised lot of questions around slowdown and recession. In India, largecaps outperformed mid and smallcaps in 2019. In terms of sector performance, Energy and Financials remained in favour and were among the top performing sectors in 2019.
On the sentiments side, Foreign Portfolio Investors (FPIs) came back strongly in 2019 and exceeded the contribution from Domestic Institutional Investors (DIIs). Flows into equity markets from the domestic mutual funds were the slowest in the last five year but SIP flows continued to accelerate.
Going into 2020, we believe that the valuation seems to be fully priced-in; having said that, a substantial divergence exists currently between Value and growth stocks with Growth stocks trading at a high premium compared to Value stocks. Hence, we believe 2020 would be a year to play the Value or Special Situations theme which aim to capitalize from such divergence.
As highlighted earlier, due to the continued outperformance of largecaps and due to the deep correction in the smallcap space, we are witnessing divergence in the Market capitalization space. Adding to this, our in-house models based on Marketcap Earnings yield and Marketcap share have decisively turned more positive on the smallcap space. Hence, we are turning positive on Smallcap and Multicap space over Largecaps.
Global and Domestic factors like US elections, US-China Trade deal, Upcoming Budget, pace of government reforms, contagion effect of credit concern etc. are few factors which may keep the market volatile in 2020. Hence, we continue to recommend investors to invest in Dynamic Asset Allocation Schemes which can benefit from volatility