“Dark clouds gathered on the horizon”

“I see a very dark cloud on America's horizon, and that cloud is coming from Rome” - Abraham Lincoln

Investment Outlook & Strategy for 2020

 Contents

Key message

Outlook for 2020

Investment strategy for 2020

2019 in retrospect
 Key message
• Indian economy witnessing a major Reset in terms of technological
evolution, regulatory framework, trade structure, development model and
federal structure.

• The businesses and markets may continue to face material disruption for
next few years, as the new paradigm emerges and demand and supply
dynamics find a new equilibrium.

• The opportunity for survivors shall be significantly larger in comparison

to earlier reset periods
• Near term impact
• Asset prices may continue fluctuate as the investors and consumers try to assess the fair
value.
• Mini bubble shall keep erupting as crowd possessing liquidity tries to capture the initiative.
initiative
• 2020 may witness
 Investments - Outlook
2020: India
Macro weakness to persist. GDP/GVA growth to stay below 6%.
3/4th population may face stagflation – low to negative wage growth & rising cost of living
Market volatility to rise sharply due to erratic flows and corporate performance
Overall equities to remain under pressure. Market breadth may remain poor.
Real interest rates to ease marginally. INR to weaken.
Liquidity conditions to remain comfortable.

2020: World
Growth to slow down
Volatility to remain heightened
Uncertainties to intensify further due to political and geopolitical conditions
Monetary policy shift to keep markets anxious
Emerging economies to come under pressure, even if flows improv1
Industrial metals and oil to remain under pressure, precious metals may gain
 Investments - Strategy
• The liquidity fueled global economic expansion looks tired. The deceleration that started in
2018, may not reverse in 2020.

• The deceleration in Indian economy may get arrested. But a broad based sustainable recovery is
highly unlikely. The recovery may be shallow and limited to select pockets.

• The asset prices may remain under pressure.

• Overall equity returns to remain poor. Current bond yields to sustain. INR may weaken. Real estate
prices may correct further.

• Corporate earnings to grow in single digits. Nifty returns may be + 8% for the year. Equity risk reward
clearly negative.
Strategy: Risk averse.
Asset allocation: Underweight Equity (50% allocation); Precious Metals 25%, Debt 25%
Equities: Prefer IT, Insurance, agri input and large Realty sectors and underweight on consumers
(especially FMCG and media).
Debt: 75% accrual; 25% long duration. Duration allocation to increase to 100% if benchmark yields rise
above 7.5%
 2020: Outlook

India Macro
• Growth: Annual growth rate to range between 5.8 – 6.2%, assuming no major fiscal
stimulus.
• Inflation: CPI to average over 4%,
%, with some seasonal spikes. Core inflation to rise
moderately as output gap fills and wage pressure rise.
• Interest Rates: Expect benchmark yields to average above 6.65%.
• Exchange rate: USDINR may average in 72.5-73 range, and move in 70-76 range.
• Fiscal deficit: FRBM targets may be relaxed and fiscal deficit may exceed 4%.
• Current account: CAD to average around 2.2% of GDP in 2020.
• Investment: No material rise in investment . Both public and private capex to remain
poor, though marginal improvements may be seen due to low base.
2020: Growth Outlook
2020: Growth Outlook

Revenue collections to remain below par

2020: Growth Outlook
Public sector investment to remain low
2020: Growth Outlook
Large output gap to restrict private investment
 2020: Growth Outlook
Rising unemployment and poor wage growth to limit consumption growth
 2020: Financial Market Outlook

India markets
• The financial market may witness higher volatility.
• The returns from Indian equity may be in the range of + 8%.
• Private investment and consumption both should remain subdued.
• Global commodities will show a mixed trend. Precious metals may do better
while industrial metals and energy prices shall remain under pressure.
• Exporters to continue underperforming.
• Bond yields may touch a high of 7.25%, and average above 6.5% for the
year.
• Real estate prices may remain under pressure in most geographies.
• INR to weaken, may average in 73-74/USD
74/USD for the year.
 2020: Equity Market Outlook

India Equities
• Earnings: The earnings drought may extend to FY21.
FY21 Expect significant
earnings downgrade and de-rating
rating of PE multiple.
• Technical: Nifty may move in a very large range this year. On the
downside, it may trade in 9730-10564
10564 range. The upside though appears
limited to 12700-13111
13111 range. The risk reward therefore is clearly negative at
present.
• Flows: Expect flows to remain erratic, despite expected resumption of QE in
the developed world.
2020: Earnings Outlook
2020: Earnings Outlook
Current earning forecasts too optimistic, may see sharp cuts
 2020: Equity Market Outlook

*2019 data till 24 December 2019

 2020: Equity Market Outlook

*2019 data till 24 December 2019

2020: Nifty Outlook

Nifty may end 2020 with + 8% change

 2020: Investment Strategy

(a) The entire equity allocation shall remain invested.

invested
(b) Overweight on IT, Insurance, agri input and large Realty sectors and underweight on consumers
(especially FMCG and media). Neutral position on other sectors.
(c) Avoid active trading in 2020.
(d) Gold allocation will be mostly invested in gold bonds.
bonds
(e) A relatively weaker INR (Average around INR72.5/USD) and stable rates assumed in
investment decisions. Any change in these assumptions may lead to change in strategy midway.
2020: Investment Strategy
 2020: Key risks
What will change market outlook and investment strategy
• Material tightening in trade, technology, and/or climate regulations
• Material escalation on northern borders
• Prolonger civil unrest
• Stagflation engulfing the entire economy
• More exits from EU
• One or more Indian states or large PSU failing to honor its debt
 2019 in retrospect

If the 2019th year of Christ is to be described in one

word, it would be – “Befuddling".

Like 2018, the year 2019 also started with great hopes, lost momentum early before

hopes were raised again in August. The year is ending with despondency all

around, except in the headline Nifty and Sensex number.

 2019 in retrospect
Some key events
The Sino-US and US-EU
EU trade wars intensified, before easing a bit towards end of the year.
Central Banks in US, Europe, Japan reversed their monetary policy stance again and signaled
resumption of QE.
Attack on Saudi oil facilities led temporary spike in oil prices. OPEC keeps Brent crude above US$60/bbl
Global growth continued to slow down marking end of longest expansion in past four decades.
Unexpected victory of conservative party in UK elections, pave the way for BREXIt in early 2020.
Stock markets recorded decent gains across the world, despite growth slow down.
New sectors of stress emerged in Indian economy as the IBC resolution process gathers steam. RBI
pauses after cutting the policy report rate by 135bps. Begins own version of Operation Twsit to improve
transmission.
PSU Bank consolidation gathers pace. NPA level come down after recapitalization and recovery from
IBC process.
FPIs turn big buyers in Indian markets after four years.
BJP scores record victory in general elections, but sufers major losses in state elections.
The relations with neighbouring countries, especially China and Pakistan worsen materially.
The country erupts in protests against Citizenship Amendment Act 2019 and anticipated NRC.
 2019 in retrospect
Seasonal spike in food prices lead CPI higher
 2019 in retrospect

Investment, consumption falls as credit growth shrinks

 2019 in retrospect
Business and Consumer Confidence collapses
 2019 in retrospect
Policy easing and abundant liquidity did not help growth
2019 in retrospect

External situation weakened

2019 in retrospect

RBI intervention keeps INR stable

2019 in retrospect
Policy transmission remained weak
 2019 in retrospect

Fiscal target ambitious, need to be adjusted

2019 in retrospect
Earnings continue to disappoint
2019 in retrospect
Market valuation not attractive
2019 in retrospect

Yield gap negative for equities

2019 in retrospect
Broader Markets underperform majorly
 2019 in retrospect
Private Bank lead BankNifty outperformance, Smallcap capitulate
 2019 in retrospect
Realty perform best, Media, PSU Banks the worst
 2019 in retrospect
Huge divergence in stock performance, indicating a structural shift in business environment
 2019 in retrospect
FPI flows at 5yr high, DII flows slow down
 2019 in retrospect

Commodities volatile, but ended the year as high note

 2019 in retrospect
US Markets ending the year at Highest note
 2019 in retrospect
Indian Equity performance in line with troubled UK, HK etc
 2019 in retrospect

Central Banks reversed their policy stance

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