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Breach of linkages between market and economy will show in 2020 too.


Date: 28-01-2020
Subject: Breach of linkages between market and economy will show in 2020 too
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. The government’s ‘shock’ corporate tax cut on September 20, 2019 turned out to be the biggest driver of market return — Nifty50 Index’s 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 September 19, 2019 (10,705), which implies that the market’s entire return for CY2019 has come after September 19, 2019.

While Nifty50 delivered 12% return, BSE MidCap Index delivered (-) 3% and the BSE SmallCap Index (-) 7% return in CY2019. The large divergence in performance among various indices reflected the economy-market ‘delink’ with weak performance of the midcap and 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) ..

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 NPLs, decline in slippages and loan-loss provisions and continued strong performance of the ‘retail’ banks, stronger competitive positi ..

Active portfolios failed to beat the largecap indices in CY2019 too, given the large weights in the indices of certain stocks that performed exceptionally well. Only eight stocks (five financials, two IT services and RIL) contributed solely to the Nifty-50 Index’s return in CY2019. The same ‘theme’ had played out in CY2018 when IT (on depreciation in the rupee) and consumer stocks outperformed significantly and contributed disproportionately to the Nifty50 Index’s performance in CY2018 (+3% in I ..

It may be time for the active investment industry to fight the ‘existential’ threat more aggressively — declining research budgets and increasing regulatory costs will only accelerate the process unfortunately.

The economy-market ‘divide’ seen in CY2019 may repeat in CY2020 with the economy likely to grow 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 CY2020 too. Real GVA growth at 5.4% in FY2021 versus 4.5% in FY2020 with favorable base effects in 2HFY21 likely to show economic ‘growth’.

One can’t see any impetus for the three broad segments of GDP — (1) private consumption is likely to be weak without a substantial pickup in household 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 g ..

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 remain subdued through FY2021 and (2) bond yields could potentially rise sharply if the government’s fiscal position turned out to be weaker versus the market’s expectations.

However, the government can provide meaningful support to market sentiment through deft fiscal management — (1) limited fiscal benefits for residential real estate to revive aggregate demand and supply, (2) large-scale privatization to raise non-tax revenues and (3) continued reforms.

Source: economictimes.indiatimes.com

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