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Outlook for Stock Market in 2020: New Year to dawn in a Majestic Bull Market

What markets are factoring in is a significant move towards better quality of corporate earnings and that explains the very strong bull momentum.

The year 2019 surprised market participants and investors alike by its sheer strength and resilience. Despite the hue and cry on slowing GDP growth, stress in the financial sector, agrarian crisis and rising unemployment; markets are closing the year with a gain of nearly 15 percent on the frontline indices.

The popular reaction to this market buoyancy is that of dismissal and disbelief. Many believe that the market is behaving irrationally and not representing the harsh economic realities. While I appreciate the scepticism and the reasons behind it, I strongly believe that market signals should never be ignored. Representing collective intelligence, markets usually are ahead of any investor or groups of investors in identifying trends. Though over short periods of time markets move on speculation and can disseminate completely wrong signals, on a longer-term, market movements are related to corporate profitability growth. One year is a fairly long period and though markets are not infallible and can stay irrational longer than expected, yet to dismiss a year-long trend as a mere blip would be certainly unwise. I for one firmly believe that this uptrend in the markets is here to stay. I innumerate here several reasons for my bullish stance.

1. Liquidity is a big factor but not the only reason why markets are at an all-time high. Liquidity especially domestic will remain high as interest rates on fixed deposits and small savings schemes are low and alternate investment options like real estate are not attractive anymore. Due to higher tax compliance and policy actions like demonetisation and GST, more and more money is moving to the bank accounts and getting formalised. This money now has limited options to earn high returns and equity markets either directly or through mutual funds is one of them.

2. Another important reason for bullishness is the corporate tax cut which is going to increase corporate profitability regardless of the slowdown.

3. Consolidation of businesses with leading companies is a big factor creating optimism. Implementation of GST along with various other reforms like IBC and RERA have pushed many fly-by-night operators out of business. Stricter compliance and regulatory environment are ensuring that only financially sound players with robust business models survive in every industry. By reducing competition from the unorganised players, this massive corporate clean up exercise is helping the well managed players to consolidate and improve their market share.

4. Market indices go up if the leading companies do well. On an average, equity portfolios are not doing as well as the indices are. This flight to quality will continue. Hence, markets will continue doing well but only the well-run companies will generate returns.

5. Street seems to be factoring in improvement next year due to the base effect. Simply put what it means is that even a modest growth next year will look optically good on a background of very modest or flat growth for a while now.

This liquidity, consolidation and base effect explains the dichotomy of poor economy data and markets trading at very high levels to a large extent.

All this still doesn’t explain the relatively high discounting of quality stocks in particular and indices as a whole. More so despite all the gloom and doom that everyone is so correctly pointing out.

This outperformance according to me is because of two things – first is that markets are a leading indicator and second is the flight to quality world over. What markets are factoring in is a significant move towards better quality of corporate earnings and that explains the very strong bull momentum. It is not visible now but market believes that after a few years, corporate India would be at par with or nearly at par with global standards in terms of compliance and regulation. Hence in many ways, markets are looking ahead and factoring in a cleaner, better governed as well as faster growing Corporate India. Since these signs are not at all obvious yet, most businessmen and professionals are not believing in this bull market. In many ways, this polarisation towards better quality markets and stocks is a global phenomenon. So, we are doing better and will continue to do so as perception of our corporate earnings keep improving.

The various observation points mentioned above make it crystal clear that markets are rightly factoring in sustained domestic as well as global liquidity chasing equity returns going forward. Moreover, as the quality of equity earnings is set to keep improving dramatically on the back of various reforms, there is no imminent threat to this market in the near foreseeable future. While valuations may appear high, they are very likely to sustain given the paradigm shift in quality of earnings going forward. Just as a very well-managed company will trade at a much higher multiple and still generate better and more sustainable returns than a poorly administered one in the same industry, similarly Indian equities will trade expensive but still generate brilliant returns for investors going ahead. So, the sooner the investors shed their disbelief and join the equity bull market, the better for them.

Consolidation of businesses is the theme of this bull market. Companies backed by quality management and business models will keep getting bigger and bigger. Hence if you keep faith and get your stock selection right, equity portfolio returns going forward have the potential to be unimaginably high. The New Year 2020 is all set to dawn in an era of equity cult in India.

(By Ashish Kapur, CEO, Invest Shoppe India Ltd)

Disclaimer: This is the author’s personal view. Readers are advised to consult their financial planner before making any investment. 

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Source: Financial Express