Market polarization is likely to end in 2020


The New Year has begun on a positive note for the global economy. A major headwind for the global economy – the US-China trade tensions – is losing steam with the agreement on the first phase of the US-China Trade Deal to be signed on Jan 15th 2020. Brexit with a deal is very much on the cards. US economic data continue to be robust. In brief, fears of a global recession in 2020 have receded. Back home in India the economy is expected to rebound from Q1 FY 2021 even though the recovery is likely to be slow.

Even though Nifty delivered 12 percent returns in 2019, the narrow rally driven by 12 to 15 stocks didn’t benefit majority of retail investors whose portfolios are skewed towards mid and small-caps. The Nifty gains conceal the crucial fact that 80 percent of listed stocks lost in 2019. Returns from most mid-and small-cap mutual funds also disappointed in 2019. What is in store for the markets in 2020?

The extremely narrow market rally of 2019 has left market valuations highly polarized. Presently we are in a situation where quality large-caps with good earnings visibility are priced to perfection; but stocks that are attractively valued have no earnings visibility. A distinct possibility in 2020 is that this market polarization will end with money moving towards under-valued mid- and small-caps. Anticipating this, investors can invest in the under-valued space.

India under-performed the Developed Markets and most Emerging Markets in 2019 due to poor economic growth and tepid corporate earnings. So, the Indian market performance in 2020 will depend mainly on how quickly the economy rebounds. FPI flows in 2020 will be another crucial factor determining the market trend. This, in turn, will depend on the monetary policy of the leading central banks and the inflation trends in the Developed Markets.

Globally, markets moved in tandem in 2017, 2018 and 2019. Bullish and bearish trends have become global thanks to the huge capital inflows and outflows, particularly the FPI money moving in and out of passive funds. This global trend is likely to persist in 2020 too. So watch out for global triggers in 2020. The high market valuations, globally, pose a risk.

It is well known that contrarian investing can reap rich rewards. The huge market polarization in India now is opening up opportunities in beaten down segments like autos, pharma, some PSUs and infrastructure. There are value-buying opportunities here. Stock-specific strategy is likely to be rewarding in 2020. But patience would be the key. 

Happy & prosperous New Year!


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