The year 2019 has taken Market Pundits by big surprise. Nobody could have imagined the way events have panned out. The unprecedented victory of an incumbent government in this election came out as a big surprise to all. Nevertheless, the GDP growth fell to 4.5% in the September quarter, the slowest pace over the last six years. While the select index stocks (HRITHIK) are pushing the market higher, the broader market is still waiting to participate in the rally. The market performance is in absolute contradiction to the economy and job growth.
Taking a stock
On the political front, India took a few significant bold decisions including Balakot strike, the passage of Triple Talaq bill, repeal of Article 370 and supreme court verdict on Ayodhya dispute to name a few.
Economy
On the economic front, India’s growth story has been dismal.
Post budget, the government had to roll back the surcharge on Equity capital gains for FPI and domestic institutional investors. Seeing the pressure on economic growth, the government came out with a flurry of key initiatives including infusion of capital in public sector banks, change in policies to support auto sector, setup of ₹ 25,000 crore AIF (Alternative Investment Fund) to support ailing real estate sector and the announcement of mega-merger of 10 state-owned banks.
The unemployment rate in October went up to 8.5%, highest since August 2016. The GDP growth came down from 6.6% in Q1 to 4.5% in Q3 for FY 2019-20. This is a huge cause for concern.
The RBI has reduced the interest rate almost by 135 basis point this year from the high of 6.5% to 5.15%. While this has increased the liquidity in the system, the investment is yet to pick up.
The government has reduced the corporate tax rate from 30% to 22% for existing companies and 25% to 15% for new manufacturing companies. We hope that this will address the supply side problem but the effect may lag.
Markets
The Indian market saw governance issues with multiple companies including IL&FS, Dewan Housing Finance, Essel Group, Yes Bank, Reliance ADAG and PMC. The retail investors who had directly invested in the stocks of these companies, took a big hit as the stock price kept coming down while they continued to invest at lower price points considering it to be a value buy. The investors in Debt Funds did not have respite either as the majority of the Debt Funds had invested in riskier securities some of which defaulted. For the first time, the debt funds investors found Debt Funds to be riskier as the Fund had invested in risky securities, not in line with the Fund’s mandate. The investors became more cautious and choosy in picking the Debt Fund and wanted to error on the safe side.
The story is not rosy on the Equity side either. Nifty is up approximately ~13% this calendar year at the time of writing this article at the strength of select few large-cap stocks in the index but the Nifty 500 return is meagre ~7.6%. There is a clear divergence in the performance of the stocks. The better large-cap stocks are demanding a higher premium in price while the broader market is underperforming.
On the global front, the US-China trade war has taken a breather on the agreement of phase one of the trade deal. The US market is on roll this year with S&P 500 clocking ~28% return till date this year. In Britain, the conservatives have come to power with a thumping majority and the Brexit bill has passed in parliament and is getting closer to get done. The global growth has slowed down to ~3% in 2019.
What should an Investor do?
The Indian economy appears to be bottoming out. The demand side needs are in place. The supply side is still a worry. The tighter job market is adversely impacting consumers’ confidence. The consumer is holding onto their wallet. The government needs to get money in the hands of the consumers. The government may try to dole out some income tax inentives in the upcoming budget but since its hands are tied, options are limited. The market may take some time before it starts heading north.
The long term investors can start increasing the exposure to the equity market over a period. The initial exposure should be in the large caps funds but when Indian economy turn arounds and risk subsides, limited exposure could be taken in mid-cap funds. This is a good opportunity to build a portfolio in anticipation of better market performance in the long term. Note that these investments should always be aligned to an individual’s risk profile and asset allocation.
Wishing you a very happy, healthy and prosperous 2020!
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. If you want to know more about him, click on https://finmyn.com/about/.