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Year ahead forecasts: What may not work in 2020 and how to separate the wheat from the chaff

Year-ahead forecasts: What may not work in 2020 and how to separate the wheat from the chaff

Year-ahead forecasts: What may not work in 2020 and how to separate the wheat from the chaff
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By Vijay Kumar Gaba  Jan 1, 2020 11:14:05 AM IST (Updated)

Breaking the process of investment into some discreet periods of time like calendar year, financial year, Samvat, etc. may not be appropriate.

This is the time to change calendars and diaries and get used to writing 2020 instead of 2019 at the end of dates. For those people who are in some way connected with the financial markets, this is also the time to read and hear what the top investors, analysts, economists, bankers, investment strategists, fund managers, brokers, journalists, financial news presenters on business TV channels around are forecasting about the market behaviour in the next twelve months.

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I have been noticing these ‘Year Ahead’ forecasts for almost three decades now. Initially, there used to be a few such reports and presentations which were keenly awaited and religiously followed. However, in recent years this ritual of forecasting the next twelve month market behaviour has acquired epidemic proportions, inasmuch as in past one month or so, I have received average seven reports every day, highlighting what theme and stocks may do well in the 2020th year of the Christ. Each report painstakingly presents the outlook for markets and the preferable investment strategy for the investors and traders to follow in the forthcoming twelve months. Most of the reports also present the actionable investment ideas, like stocks, commodities, bonds and currencies that may be bought by the investors and traders to benefit from the respective strategies.
The writers and presenters give exotic titles to their reports and presentations; and use differentiated formats to attract the fancy of the users. However, given the information technology evolution; and growing automation in the process of financial analysis, the scope for a differentiated opinion has narrowed considerably. Any materially differentiated opinion, therefore, is more likely to be subjective and speculative.
Taking forecasts with a pinch of salt 
Obviously, there is a noticeable overlap in the views of the experts, leading to certain degree of contempt in the attitude of the readers and listeners. I observe that these days most of these forecasts are charitably received, notwithstanding the accuracy or otherwise of previous such forecasts, only to be discarded with contempt within a few days just like the old calendar and diaries.
I personally believe that the investment, like any other business, is a continuous process. Breaking the process of investment into some discreet periods of time like calendar year, financial year, Samvat, etc. may not be appropriate. It is like telling an industrialist that he should close his factory on December 31 each year and make a new business plan for the next twelve month. Nonetheless, for financial investors these discreet points of time in the ad infinitum, could be useful, as these provide an opportunity to pause, reflect back, review and revise investment strategy.
Insofar as the year 2020 is concerned, I have deciphered two majority views from the numerous reports I could manage to read.
The global experts are forecasting 2020 to be a year full of uncertainty and volatility. Driven by their commercial compulsions, most experts have presented their views as ‘Glass half full’, which incidentally has been the case in most of the past 10 years since the global financial crisis.
Most of the reports relating to India are circumspect about the economic recovery, both domestic and global. Notwithstanding, most of them appear strongly arguing for an equity rally in the broader markets. In this sense, a fair degree of incongruence is visible in the experts' views.
In my view, one or more of the following three factors could be driving the analysts' forecast of mid and small-cap stock outperformance.
(i)    The expectation of a mean reversion in mid and small-cap stocks that have underperformed massively in the past two years.
(ii)   The hope of hitting a jackpot; and
(iii)  Fear of mean reversion in the large-cap stocks that have outperformed massively in 2019.
Another thing that is conspicuous by its absence from a large majority of these ‘Year Ahead’ prophecies is what may not do well in the year 2020. To be fair, a few report from large brokerages do mention the sector ‘underweight’, but none highlights the sectors, category and stocks to be avoided; which in my view is more important under the current circumstances.
An investment strategy 
As a tiny investor, who has closely observed the Indian stock markets for three decades, I believe that my fellow small investors would do better to consider the following in their investment strategy:
(a)   Historically, in each market cycle, about 2-3 percent small and midcap stocks migrate to the higher orbit both in terms of business size and market capitalisation. The rest who gain only in terms of market capitalisation but not in terms of business size, usually give up all their stock price gains towards the end of the market cycle. None of these laggards is likely to do well in the subsequent market cycles. However, pure commodity stocks like metals and sugar etc. could be exception to this.
So, the mutual funds and PMS which are sticking with boom-bust stories of 2016-2019 market cycle are least likely to perform in the next few years at least. If you are looking for multibaggers, focus on new kids on the block.
(b)   My interaction with many bureaucrats and government contractors and suppliers in the past three months suggests that there is huge payment backlog for these contractors and suppliers, which is not likely to ease in the next 12-15 months at least. Many of these contractors and suppliers have in fact stopped bidding in government tenders. The balance sheets position and growth of such contractors and suppliers shall remain stressed for FY21 at least. These companies may be totally avoidable, irrespective of their present market capitalization and order book size.
(c)   More than half the economy is witnessing severe stagflationary conditions. While their wages are stagnant or falling, their cost of living continues to rise. Many local bodies have reported a delay of 1-4 months in payment of salaries. This shall continue to impact the discretionary consumption over the next one year at least. The growth in staple consumption may also be materially restricted. Consumption, including consumer finance, may not be a great space to invest in 2020. However, a few companies may gain from market consolidation as lots of smaller and unorganised businesses become unviable and shut down.
(d)   Stressed balance sheets may continue to remain so. The debt resolution through IBC etc., may help the lenders realise a part of their dues, but the equity value in a large majority of such businesses shall remain nil to negative. Buying these businesses must be understood as buying lottery tickets with one in 10 million chance of a prize.
Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation. The views are personal. 
Read his columns here.
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