Equity performance in the month of December will depend a lot on the inflows of FIIs to India. While FIIs inflows will depend on the tendency of global market and the risk-on mode to invest in emerging economies. December is a thanksgiving season in the western part of the world with long holidays, which generally impacts the strength of the inflows. Historically the behaviour has been volatile. In the last 5 yrs, The Nifty50 was +3% to -3.6%, marginally negative with average of -0.2% while Nifty Midcap was +6% to -4% positive with +1.5%.
In the last 3 years, Fed policy meet which is usually held during the second week of Dec used to attract high weightage since it defines the trend of global interest rate & hence the equity market. Lower interest rate is and was a need of the global financial market which is slowing down. This time the market expects a dovish view with no hike in rate and maintain the stance in CY20. Along with that we will have to handle two key global events which will control the final trend of global market, namely US-China trade deal & Brexit (UK election 12th Dec). About US-China deal, market was expecting the first phase deal to be signed in December. But this week, market turned cautious due to a negative tweet by Trump that he is not in a rush to finalise a deal with China. US also imposed import tariffs on Argentina & Brazil due to accusation of continuous devaluation of their currencies to USD. There were also vibes that China may retaliate over US support to Hong Kong, impacting the progressing trade deal.
FIIs inflows may be the key this month but we should also consider the inflows of MFs which have become a very powerful player in the last 2-3years. MFs have invested an average net inflow of Rs7,000 cr in the month of Dec, led by financial investment in equity versus physical investment. In addition, it is very vocal domestically that the economy is at its worst and corporate earnings has bottomed out which will invite other players like Banks, Insurance, Proprietary and HNIs to invest more.
Regarding RBI policy meet, it is a well-thought unanimous decision of RBI to give ample time for the transmission of five consecutive rate cuts undertaken since January 2019 and get better clarity on the inflation trajectory. With the slowdown in India getting more severe than expected and RBI cutting real GDP forecast to 5% from earlier 6.1% for FY20, we can expect more rate cuts depending on the evolving macro-economic data in the upcoming MPC meetings. We don’t expect this decision to completely change the trend of the market rather than consolidation in rate sensitive stocks in the short-term.
Market may be volatile in Dec, but it is expected to maintain its buoyancy in the long-term since the environment for equities has improved. Ease in trade war, Brexit, reduction in geopolitical risk and accommodative monetary policy will support world equity market. Domestically, interest cost is falling, tax is reducing and incentives are inching up which is a good time to invest in equities. Sectors like Finance due to NPA resolution & reduction in interest cost and cyclicals like Metals & Industrial will outperform in the next 1-2 years. Quality Mid & Small caps will discover better valuation and exporting companies like Chemicals & Aquaculture will drive growth. Rural focused ideas like agriculture & fertilizers will also perform better while Infrastructure will be volatile in the near-term with a positive outlook.
