Indian equities are likely to continue the upward trend this year, despite major headwinds such as the economic slowdown and fiscal slippages.
Indian stock markets are expected to see healthy returns in 2020, though there may not be a quick recovery in the economy, said analysts. The divide between rising Indian equities and a weak macro economy, which puzzled investors in 2019, is likely to continue in 2020.
Credit Suisse expects headline indices to stay elevated, despite continuing weakness in the Indian economy, driven by steady fund inflows and earnings growth from firms that are not directly hurt by domestic macroeconomic weakness, but benefit from factors such as rising penetration of products and market-share gains.
"Even as destocking ends in some sectors, driving some stabilization in the economy, pro-cyclical forces in credit, fiscal, and sentiment may still create downside risks. Policy interventions to get a growth rebound to 6.5% levels are not politically challenging, but it is unclear when they may be undertaken. Efforts to reduce the cost of capital should be among the first of these. We expect headline indices to stay elevated driven by inflows and as most of the market cap is in stocks linked to rising penetration of products/formalization, market share gains, or global factors," said Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India Equity Strategist at Credit Suisse.
Narrow market performance will continue for now, as economic uncertainty continues to push funds into "safe" stocks, resulting in higher market concentration, said Credit Suisse.
ICICI Securities expects Nifty earnings to have a compounded annual growth rate (CAGR) of 17% during FY19-FY21. It said that absolute returns, at high single-digit, for Nifty during 2020 are constrained by the sharp run-up in stocks in the fourth quarter of 2019, thereby stretching equity valuations.
"We expect small/micro-caps to outperform mid-caps as the former asset classes have much higher margin of safety in terms of the risk-spread over large caps. Top performance of gold in 2019 points at a period of scepticism towards risk assets and could continue in 2020 as global central banks' appetite for gold continues especially in an environment of negative rates in developed economies," ICICI Securities said in a report on 17 December.
Gold outperformed equities, gaining 18.75% in 2019, registering its best performance in 10 years.
Overall benchmark indices, the Sensex and the Nifty, were up 14.38% and 12.02%, respectively, in 2019—their best performances since 2017.
On Tuesday, the BSE Sensex, lost 304.26 points, or 0.73%, to close at 41,253.74, while the Nifty 50 index lost 87.40 points, or 0.71%, to close at 12,168.45, following weak global markets.
According to UBS, base-case target for Nifty by June 2020 is 12,300, based on 18 times forward price to earnings (PE) multiple, with upside/downside scenarios at 13,300/ 10,300. "We have been constructive over the past three months, but post the recent rally, Nifty is trading at 18.5 times one-year forward PE multiple. We believe the risk-reward is becoming less attractive in the near-term," UBS said in a report on 16 December.
The Indian economy witnessed a sharp slowdown in 2019. While investments, particularly private investments, have been decelerating over the past 3-4 years, the slowdown in consumption is more recent, and has impacted the macro economy for the past 4-5 quarters.