Equity monthly view for January 2020

February 6, 2020
Quantum Equity Team

In the first month of year 2020, S&P BSE Sensex fell 1.3% (total return basis). S&P BSE Midcap and S&P BSE Smallcap indices performed much better. They had gain of 3.3% and 7.1% respectively.

Sectors such as real estate, telecom and consumer durables had superior performance during January 2020. Metal, oil & gas and PSU were among the sectors which dragged overall performance. Reliance Industries stock was down 6.8% for the month.

FIIs invested USD 1.4 Bn during the month of January. Domestic institutions were net buyers to the tune of USD 0.3 Bn. Of this, 0.2 Bn came from mutual funds with insurers contributing the balance. Indian rupee appreciated marginally during the month from 71.38 to 71.35 per US dollar.

Geo-politics had a tumultuous start in the year and decade beginning 2020. There were tensions fuelled by killing of Iranian commander by US drone attack. Crude oil prices flared up in anticipation of counter attack by Iran. However matters cooled off and crude oil fell to levels before the current crisis.

January also witnessed signing of phase one deal between US and China, leading to minor truce among the leading world economies. China would buy USD 200 Bn worth of agricultural commodities, energy and other goods/services in exchange of lower tariffs on Chinese exports to the country. The countries will also tackle other contentious issues as part of phase 2 talks.

Later part of January coincided with outbreak of epidemic coronavirus. While it started in Wuhan state in China, it has spread to other parts of the world. Death toll has already crossed 500, all except 2 reported in China. There has been restriction on travel especially to China and nearby countries. China would be impacted with closure of factories, offices as well as consumption taking a hit with people staying indoors. Global supply chain for most products are also linked to China. This can cause disruption globally with India impacted as well, depending on how long it lasts.

Global monetary policy and liquidity remain at benign level. After loosening interest rates in 2019, central bankers remain in watch mode. With inflation closer to 2% and unemployment at very low level, US interest rates remain on hold for now.

Union Budget was announced on 1st February 2020 for financial year 2020-21. This was the 2nd Budget of NDA III under finance minister Ms Sitaraman. Fiscal space to the government was limited given lower tax collection and already announced tax cuts to companies in September 2019. On the positive side, Government showed spending discipline to rein in fiscal deficit to 3.5% for fiscal 2021.

Above will keep interest rates in check as excess government spending can fuel inflation and feed into interest rates. Deficit for current fiscal year is likely to be at 3.8%. Dividend distribution tax (which leads to double taxation of same profit) is abolished, which is likely to increase dividend payout by companies post Budget.

Among the negatives, Budget didn’t help industries which have been facing slowdown for some time. Real estate, NBFCs were looking for some help which didn’t come. Allocation to rural schemes such as MNREGA employment doesn’t show much increase. Given that rural sector faces stress and sections of population face malnourishment and illiteracy, support is critical for long term growth and prosperity of the economy.

Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many nations. Economy is dependent on domestic consumption and thus insulated from any global problems over the long term. While economic growth faces pressure in near term, better monsoon and measures to ease liquidity are likely to stimulate growth. Events like global trade wars have very limited impact on India. Investors can expect decent return from equities over a long period in future. Investors should use this opportunity to allocate to equities. Even though markets appear at all-time high, this is driven only by selective stocks.

Data Source: Bloomberg

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