The broader consensus about the Indian economy is that the economy has bottomed out in the last quarter and things are expected to improve from here on.
To say that the Indian equity markets have been choppy in 2020 so far would be an understatement. The extreme market gyrations of the equity markets have left investors confused and unable to find a clear trend. Benchmark indices continued the pre-budget rally with the Sensex touching a lifetime high on the 20th Jan 2020 in anticipation of a revolutionary budget which would spur growth and consumption to help the ailing economy. The immediate post-budget reaction was negative as the Union Budget did not measure up as a path-breaking one as it was widely perceived to be, some of the key market expectations around LTCG (Long Term Capital Gains) and STT (Securities Transaction Tax) were not addressed.
After seeing a massive sell off post budget, the indices made a remarkable recovery, only to give up those gains in the last few trading sessions. The markets are expected to remain volatile in the coming days as they continue to price in the development around the spread and containment of the Corona Virus epidemic. However, the broader consensus about the Indian economy is that the economy has bottomed out in the last quarter and things are expected to improve from here on. The speed of the economic recovery is still not clear.
With the economy in dire straits and private investments still stalled, it is the onus of the government to jumpstart the economy with large public spending. The government’s plan to spend Rs 100 trillion in the next five years is geared towards addressing the same problem. Keeping this in mind, infrastructure is one space which holds a lot of promise in the next three to five years. Massive infrastructure spending will have a ripple down effect on several ancillary and allied sectors. Accounting for these facts, we have collated a list of some investment themes which are expected to be profitable for this year and beyond:
Mid & small-cap Stocks
The current market rally is not broad based and stocks in the mid cap and small cap space have severely underperformed in the last three years. It’s our expectation that in 2020 investors would move beyond marquee names in the large cap space and look for value and alpha in the mid and small cap stocks. With this said, investors are advised to screen for good-quality beaten-down stocks in this space and stay invested with a minimum one-year time horizon.
We believe the Indian economy has bottomed out and going forward the recovery would be backed by the financials doing extremely well. PSU banks are expected to do extremely well as the overhang of the NPA (Non-Performing Asset) has finally subsided, the banks are expected to see healthy recovery through the NCLT framework and the consolidation of several PSU banks is good for the industry. One can also look for larger NBFCs with superior pedigrees as these are also expected to do extremely well as they have been able to keep their NIM’s intact and with less competition around they have more space to grow and expand their foot print.
Industrials & Construction
With a major push and significant spend on public infrastructure, we are extremely bullish on companies in this space. Investors are advised to prefer companies which have a good track record of project completion and healthy order book position.
This sector would be a direct beneficiary of the massive infrastructural spending. We expect that companies in this space will show healthy earnings growth and improving RoEs will generally lead to re-rating of the space. Select well-run companies in the mid cap segment in this sector are expected to be the major beneficiaries.
Metals: In any economic recovery the metal sector is expected to do well and with the de-escalation of the US-China trade war and improved growth projections for both developed and developing economies, companies in this space would be ultimate gainers. It is our belief that the sector has bottomed out sometime in October, and things are looking up now.
The sector may well emerge in 2020 from its multi-year slump as it’s widely believed that the sector has bottomed out. Selected opportunities have emerged as valuations have become quite reasonable.
Chemical: Specialty Chemical Companies, those who are leaders in their respective segments, are going to benefit from the expected economic recovery. Agro Chemical companies are expected to do well as we expect that governments aim of alleviating agrarian distress, and benefit of Indian sectors form the struggling China economy could benefit this space.
Oil & Gas
After a poor show in FY19-20, Oil & Gas companies’ earnings growth is expected to be healthy in FY21 and within the space we are more bullish on gas distribution companies as revenue & earnings visibility are high.
We have carefully collated a list of stocks in the sectors that we have mentioned and are extremely bullish on. Investors are advised to treat these stocks as the first step and do their research before considering any of these names for investments.
Recent trends in the Indian equity markets depict a tussle between extremely overvalued large cap marquee names and their lesser extremely undervalued peers. It is expected that things will converge and the focus will shift towards value investing. A sound strategy to create wealth in 2020 would be to selectively choose businesses that have good management, clear path to sustainable growth and ample scope for quick re-rating.
To summarize, the sectors and stocks that we expect to do well in 2020 are hinged on the premise that the worst is over and the measures announced in the Union Budget 2020 would be able to spur consumer demand and stem the economic decline. If the Indian economy turns around, which we believe it should, these stocks are expected to do extremely well. Investors would be well served if they consider these sectors with a longer-term view, which should be at least two to three years.
(By Rahul Agarwal, Director, Wealth Discovery/EZ Wealth)
(Disclaimer: This is the personal view of the author. Readers are advised to consult their financial planner before making any investment)