Another roller coaster year for markets
Sensex gained 12% while Nifty ended up 10% despite challenges such as the trade war and economic slowdown
After delivering flat returns in the previous Samvat, the benchmark Sensex and Nifty ended the latest Hindu calendar year on a good note, with the former gaining 12 per cent and the latter 10 per cent. However, it has been a choppy ride for the equity market.
After delivering flat returns in the previous Samvat, the benchmark Sensex and Nifty ended the latest Hindu calendar year on a good note, with the former gaining 12 per cent and the latter 10 per cent.
However, it has been a choppy ride for the equity markets. At one point, the Sensex had risen nearly 16 per cent during the year, only to give up nearly all gains before staging a comeback, driven by the surprise reduction in corporation tax rates, in September.
Investors had to navigate through several headwinds — both global as well as domestic — during the course of the year. Fears of global recession, the US- China trade war, and the uncertain global monetary scenario, all weighed on foreign portfolio investor (FPI) flows, a key driver of the market.
On the domestic front, the economic slowdown, disappointing corporate earnings, rising defaults, and turbulence in the NBFC (non-banking financial company) space tested the nerves of even the smartest of investors.
The Bharatiya Janata Party’s (BJP) re-election at the Centre provided an impetus, with both the Sensex and Nifty climbing to all-time highs of 40,312 and 12,103, respectively in early June. The optimism, however, fizzled out amid the slowdown and earnings growth headwinds.
While, the benchmark indices put up a respectable performance, the broader markets continued to witness pain, with the mid-cap and small-cap indices ending Samvat 2075 with a loss of 6.4 per cent and 9.6 per cent, respectively. The losses could have been deeper if not for the corporation tax rate cut last month.
“The mid- and small- cap indices corrected substantially during the year. The broader market performance has been forewarning about a big slowdown in the economy. Further, the gains made by the benchmark indices was driven by only a few stocks,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.
The Nifty components saw a hugely divergent performance during the year. Key stocks, such as Bajaj Finance, Asian Paints, and Titan, clocked healthy returns, while YES Bank, Zee Entertainment, Tata Steel, and JSW Steel corrected sharply.
Analysts said investors piled on to stocks that managed to post good
THE MID- AND SMALL-CAP INDICES CORRECTED SUBSTANTIALLY DURING THE YEAR. THE BROADER MARKET’S SHOW HAS BEEN FOREWARNING ABOUT A BIG SLOWDOWN. FURTHER, THE GAINS MADE BY THE BENCHMARK INDICES WAS DRIVEN BY ONLY A FEW STOCKS Andrew Holland, CEO of Avendus Capital Alternate Strategies
THE INTERNATIONAL SITUATION REMAINS UNCERTAIN ON ACCOUNT OF TRADE WARS, BREXIT, AND GEOPOLITICAL TENSIONS IN WEST ASIA. AT THIS JUNCTURE, THE INTERNATIONAL SCENARIO SUGGESTS FPI FLOWS INTO EMERGING MARKETS WILL REMAIN TEPID U R Bhat, MD of Dalton Capital India
performance in a challenging environment, and severely punished companies with governance or debt concerns.
“Many leveraged companies have become an area of concern,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services. “Overall economic parameters slumped with GDP estimates being revised down, meaningfully. Earnings again saw continuous downgrades and hopes of recovery saw further delay,” he added.
Another pain point for investors was of the Budget presented in early July. Lack of stimulus, a controversial surcharge on FPIS, and the introduction of a buyback tax that hurt investor sentiment.
The Sensex dropped as much as 9 per cent between the Budget and the corporate tax cut announcement. The sharp fall came on the back of ~30,000 crore being pulled out by FPIS during the two months to August. Under pressure from the markets, the Centre revoked the surcharge on FPIS. However, it did little to reverse the foreign outflows. Mutual funds continued to provide counterbalance support to FPI outflows. However, their buying moderated amid redemption pressure from investors.
Returns may stay muted
Most i nvestors believe returns i n Samvat 2076 could remain muted, given that the economic recovery is expected to take a while. However, the tax rate cut is expected to boost earnings growth. Many believe the global cues could hold key for market performance.
“The international situation remains uncertain on account of trade wars, Brexit, and geopolitical tensions in We st A sia. At this junc ture, the international scenario suggests FPI flows i nto emerging markets will remain tepid,” said U R Bhat, managing director of Dalton Capital India.
S ome believe the global indices could get a lift in the run-up to the US elections slated for November 2020. In addition, any breakthrough in the US- China trade deal could help overseas investor sentiment.
“If the trade deal goes through, we could see resurgence in FPI flows,” said Holland.
While the trend has been weak, valuations continue to remain lofty with the benchmark indices trading above their long-term averages. However, some believe investors should use the volatility as a buying opportunity.
“Next year too, the market could see bouts of correction, given the uncertain environment. However, investors could use it to accumulate good stocks for the long term. The economy is expected to revive once measures taken by the government play out. However, the indices could rally ahead of an actual recovery,” said an expert.