The year 2019 was definitely an eventful one for the markets as a number of crucial events unfolded and new challenges emerged on both global as well as domestic front. This led to increased volatility in the Indian markets. In terms of performance, while the benchmark indices remained resilient and scaled new highs, the broader markets struggled to make a mark and underperformed. This is the second consecutive year where only a few select large caps have outperformed and rightly so as a number of negative factors outweighed the positive thereby restricting the rally of broader markets.
Among sectors, banking performed consistently well, thanks to regular rate cuts by the RBI and better than expected asset quality. Further, resilient demand in consumer durables (CD) despite the current slowdown resulted in strong gains for the CD index. Besides, IT and Realty too witnessed a decent surge in the passing year. On the flip side, weaker economic outlook both global and domestic led to a sharp decline in Auto and Metal indices.
In 2020, the scenario is expected to improve citing recent developments on the global front. Besides, the steps taken by the government and the RBI would also start reflecting results in the coming quarters.
On the basis of the above scenario, we’ve selected sectors that could do well in the calendar year: Auto: An uptick in demand and lower borrowing cost would aid revival in consumption and volume recovery in the sector. Further, management commentary (in Q2FY20 earnings) and way forward outlook by key auto companies were encouraging, this brings in some optimism to invest in the sector. Investors should be selective in Auto space and invest in companies like M&M, Subros, and Maruti. Banking/NBFC: Many companies in this space have shown signs of improvement in the earnings season, with regards to assets quality, declining NPA as well as slippages. In addition, measures from the government and the RBI such as lower interest rate, corporate tax cut, easing of FDI norms, GST rate cut and re-capitalization of PSU banks are definitely positive for the sector, which would boost growth going forward. However, we would be selective in this sector and stick to large private banks and selected PSBs like ICICI Bank, HDFC Bank, Axis Bank, and SBI, owing to better asset quality, consistent financial performance and market share gains. FMCG/Consumer Durables: This is an all-time favourite space for investors as it is considered a defensive sector against the volatility of the market. Currently, many stocks in this space are hovering near to peak levels so one needs to wait for some correction as well as valuation comfort. Hence, we advise investing in a staggered manner and on dips in this space. We remain positive on stocks like Britannia, Dabur, Colgate and Marico, which would benefit going forward on the back of pick up in rural demand, volume recovery and corporate tax cut. Metal: In 2019 so far, the Metal sector has severely underperformed the market on rising concerns of global economic slowdown as well as the intensification of China-US trade war. However, there is a silver lining in the sector given that now China-US trade negotiations are taking place and a positive outcome is expected out of it. Further, few commodity prices are inching up which bodes well for the sector. Many Indian and global companies have also undertaken a cost control initiative to combat the slowdown which should reflect in the profitability going ahead. Pharma and Healthcare: Indian pharma companies reported healthy numbers in Q2FY20 due to growth in the domestic business primarily due to monsoon related diseases as well as new launches. However, growth was not very encouraging in the other geographies which still face quality-related issues raised by USFDA. Having said that many large companies seem to have improved their quality standards following USFDA observations and many of them are pursuing opportunities in the domestic and US market with the help of new launches. However, one could observe the next quarterly performance before being sure of a sustainable recovery in the pharma space. Nevertheless, buying in select stocks for the long-term may provide healthy returns. Ajit Mishra is Vice President of Research at Religare Broking