Sensex, Nifty rally to be selective in 2020; check key investment strategies

Published: January 6, 2020 11:53:30 AM

The year 2019 was an eventful one where a number of factors worked in favour of the markets, while few hindrances capped the upside of the markets.

On the flip side, due to growth concerns and subdued earnings at a broader level, investors preferred to stick to blue chips.
  • By Ajit Mishra

The year 2019 was an eventful one where a number of factors worked in favour of the markets, while few hindrances capped the upside of the markets. Incumbent government’s thumping victory in the general election, the government and RBI’s growth revival measures, dovish monetary policy as well as positive global cues towards the end of the year lifted the investor sentiments. On the flip side, due to growth concerns and subdued earnings at a broader level, investors preferred to stick to blue chips and therefore, despite Sensex and Nifty giving healthy returns, the markets failed to recover at a broad-based level.

Going into 2020, there are several concerns that still prevail in the economy such as recent spike in inflation, weak GDP growth so far and a reasonably good possibility of fiscal slippage this year. On the global front too, though the recent developments on the trade war front between the US-China and Brexit have eased the pressure, these concerns are far from over. Nonetheless, going forward, we expect these concerns to subside in the coming quarters and expect a gradual recovery in the domestic economy. Besides, with positive signs on the trade war front and US Fed dovish stance, we expect a recovery in global economic growth as well. From the market perspective, the run-up is pricing in revival in growth and recovery in the corporate earnings cycle. However, given the current challenges, we believe that the recovery would be gradual.

On the sectoral front, we expect FMCG, Auto and Capital Goods which delivered negative returns in 2019 to recover in 2020 on the lines of recovery in the economy and as public/private capex picks up pace. Further, Metal would be one sector to watch out for as trade tensions have begun to subside and commodity prices are showing signs of recovery. Also, the outperforming sectors of 2019 – Consumer Durables, Realty and Banking may continue to remain in focus in the run-up to the union budget 2020. Moreover, there is a real case to be made for the mid and small-cap stocks that have seen a decline in the last two years.

Our strategy for 2020 would be a tad different than last year (when only selected large caps
performed) as we believe that 2020 could very well be the year where we can see a strong
outperformance from mid and small-cap stocks due to a) valuation comfort, given the sharp
correction, b) anticipated economic recovery would improve growth outlook for these companies leading to better earnings. It has also been observed in the past that mid-cap/small-cap stocks do well in a declining interest rate scenario which is the case currently as the transmission of rates from banks has just started.

Having said that, we do not expect the rally to be as broad-based as seen in 2017 and investors should remain selective in this space and stick with quality names. To conclude, a stock-specific approach in sectors with high growth potential could lead to healthy rewards for investors in 2020.

(The author is VP Research, Religare Broking. The views expressed are the author’s own)

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