INSUBCONTINENT EXCLUSIVE:
In Calendar 2019, the domestic stock market did reasonably well while the economy floundered
A few largecaps delivered stupendous returns while midcaps and smallcaps delivered negative returns
Financials did extremely well while many other sectors struggled
entire return for CY2019 (12%) came after September 19, 2019.
Nifty50 delivered healthy return in CY2019 while economic growth decelerated
sharply with H1FY20 (April-September, 2019) GDP growth declining to 4.8 per cent
The performance of the largecap indices was helped by strong performance of a few largecap stocks and earnings upgrades for most stocks post
the corporate tax cut on September 20, 2019.
Incidentally, the Nifty50 index was at similar levels on December 31, 2018 (10,863) and
delivered 12% return, BSE MidCap Index delivered (-) 3% and the BSE SmallCap Index (-) 7% return in CY2019
smallcap indices reflecting the general slowdown in the economy and the strong performance of the largecap indices reflecting better
earnings outlook for certain largecap financials (favourable industry structure, improving operating outlook) and telecom companies
(improving market structure and pricing).
Largecap stocks also showed massive divergence in performance with many financial stocks and RIL
delivering 20-60 per cent returns but several automobile, oil - gas and utilities stocks delivering large negative returns
The strong performance of banks, diversified financials and insurance reflect re-rating of multiples of the beaten-down banks on peaking of
portfolios failed to beat the largecap indices in CY2019 too, given the large weights in the indices of certain stocks that performed
weakly (5.5% real GVA growth) and market earnings likely to grow strongly (25% for the Nifty50 Index).
There are risks to both in the
context of a longer-than-expected slowdown in economic activity and limited options before the government to kick-start the economy
Anyway, structural issues cannot be resolved through fiscal/monetary solutions alone.
The economic cycle is likely to remain subdued in
income; the decline in household savings rate and it simply reflects a slowdown in household income growth relative to consumption growth,
(2) investment demand is likely to decelerate further given challenges with income and balance sheets of companies, government and
households and (3) government spending may slow down from current high levels given fiscal challenges; this has been a big contributor to
growth.
Valuations of the broader market may look reasonable on a historical basis and versus bond yields
However, we should note that (1) earnings estimate may turn out to be optimistic for the consumption sectors if economic activity was to
non-tax revenues and (3) continued reforms.