Market Overview – December 2019 Quarter

Global Economy:

Global economic growth is forecast to edge up to 2.5% in 2020 as investment and trade gradually recover from last year’s significant weakness but downward risks persist with advanced economies growth slipping to 1.4% whereas emerging and developing economies expected to grow at 4.1%.

Corona Virus: There will be an impact on global trades considering recent incidences of effected cases of virus in countries other than China and hence broadly global markets will remain volatile including India.

USA:  Even with recent cease-fire in the US-China trade war, US GDP growth for 2020 was expected to fall to 2% from 2.2% in 2019. Strong labour markets are resulting in higher consumer spending which is the key factor driving this growth. However, disruptions due to the deadly corona virus may lead to downside risk to the earlier estimates until the outbreak is contained.

Fed Rate: The Fed after 3 successive 25 bps cuts as part of its midcycle adjustment held rates status quo in the range of 1.5-1.75%. Mr. Powell, Chairman Fed showed confidence in US economy as strong backed by consumer spending due to lowest unemployment rate in 50 years and indicated that they would continue to monitor the corona virus for its impact on domestic growth.

China: China was widely expected to announce a GDP growth target for 2020 of 6% following 6.1% growth in 2019. As per Morgan Stanley, Chinese Q1 GDP growth can fall to 3.5% if the spread of corona virus is not contained fast enough for manufacturing to resume to normal levels. With expected policy and stimulus measures, growth is expected to rebound from Q2 onwards and in the worst-case scenario, GDP growth for the full year may be revised downwards to 5.6%.

Indian Economy:

Indian economy growth has decelerated rapidly over the last 12 months with Q3 GDP growth falling to a meagre 4.7%. While the economy should begin recovery from Q4, the recovery would be slower than expected as per Global Rating Agency Moody.  

Private consumption, which all along supported economic activity, has slowed down significantly due to drying up of lending from NBFCs and Public Sector Banks. Additionally, credit to industry grew by mere 1.6% Y-o-Y in December 2019. Further, the expected recovery will also be impacted by the impact of corona virus in China as quite a few of Indian sectors are dependent on China for their RM requirements.

Highlights of Union Budget 2020-21

There were evidently a lot of expectations from the Union Budget 2020 to revive the overall economy. However, it appears to have missed to meet those expectations considering the fiscal situation of the economy.

However, we believe, that the budget in itself cannot be regarded as full and final as we have seen that lot of policy actions have been taken outside of budget and hence, we have to see the budget in that context and sequence of events pre and post budget.

The removal of DDT and taxing the same in the hands of the investors would bring a bit more of equity in terms of tax applicable to each individual in his case. However, many companies which are held heavily by promoters might restrain themselves from announcing dividend since they might be heavily taxed under super-rich taxes. Also, government has tried to make tweaks to personal tax regime in order to keep more funds in the hands of the tax payer by letting them choose to “save vs spend”.

RBI Policy: RBI MPC decided to keep the policy rates unchanged during its February 2020 meeting (following a cumulative 135 bps cut in repo rate from February to December 2019) along with continuing with their accommodative policy stance as long as it is necessary to revive growth. With inflation increasing in the recent months above the targeted range, future policy actions would be data dependent with short-term focus on improving liquidity condition and higher rate transmission.

Also, RBI by adopting various other measures like operation twist and LTRO, is trying to push liquidity and transmission of rates in the system.

Corporate Performance:

Top-line growth across most sectors seem to be bottoming out with nearly 50% of companies showing growth vs September 2019 quarter. However, profitability improved significantly on the back of lower commodity prices and reduction in corporate tax.

At the broader level, large caps continued to outperform Mid and Small-caps during these challenging times and results should start improving from Q2’21 on the back of better monsoon and lower commodity prices (Q1 for quite a few sectors may be impacted due to disruptions on account of corona virus).

Automobiles, Metals, Oil & Gas, Consumer Durables and Cement performed poorly whereas IT, Pharma, Chemicals, Telecom, BFSI and FMCG did fairly well.

Stock Markets:

The Indian stock markets had one of the worst months in Feb 2020 in terms of performance since probably 2008 with Large-Caps as well as Mid-Caps falling by ~7%. This was mainly led by concerns around slowing global growth due to spread of Corona virus spreading across the globe and not only impacting China.

At this point of time it is difficult to predict how the Indian economy will be impacted in the short-term due to Corona virus and hence, difficult to predict future stock market moves. However, like past history suggests, this too shall end.

However, we have continued our stand of holding the portfolio companies as we don’t see any major impact due to Corona virus at this point of time.

We would like to end the update with the following quote:-

 “While it can’t be said that life is always fair; In most cases and over the long-term – stock market is”

       – Joel Greenblatt

Happy Investing!!