Big Story. Outlook: Will stock market recover in 2020?

This might appear to be a strange question, if one went by the performance of the Sensex and the Nifty alone.

Both the indices are on a ra-ra uptrend, hitting new lifetime highs every other day. But except for the top 100 stocks, the rest of the listed universe has been in a deep correction since January 2018.

This issue was analysed in the Big Story, ‘How long will the bear market last’ , published on October 5, 2019.

All the traits of a bear market continued in 2019. Even as the Sensex raced around 15 per cent higher, the BSE mid- and small-cap indices are down 4 per cent and 9 per cent, respectively, this year. The market capitalisation of BSE is currently at ₹1,54,47,719 crore — 3 per cent below the highest level recorded in August 2018.

Of the stocks actively traded on NSE, 77 per cent have recorded a decline in stock price. What is of greater concern is that one-fourth of the stocks have lost more than half their value in 2019, and almost 47 per cent of the stocks have lost more than 30 per cent in value.

This means that an investor who does direct stock- investing had a 50 per cent chance of picking a stock that lost a third of its value, this year.

The good news is that the bear phase that began in 2018 has already straddled 23 months.

An analysis of the time taken by previous bear markets tells us that there is a strong likelihood of this painful phase coming to an end in the next 2-3 quarters. But first, let us look back at the year that has gone by.

Flood of negative news

The year 2019 began on a fairly steady note. The full impact of the IL&FS crisis was not yet known and the upcoming general elections had analysts hoping for a second term for the Modi-led NDA which would take the reform agenda forward. It was a good first half for stocks, with a pre-election rally lifting prices of large-cap stocks even as global concerns — including the US-China trade war and the prospects of a messy Brexit — caused bouts of volatility.

The scales, however, turned after the full Budget presentation in July. A lacklustre Budget and an adverse tax change, impacting FPIs (foreign portfolio investments), caused a sell-off in stocks in the couple of months that followed. A sharp slowdown in the June quarter GDP led by contraction in private final consumption pushed stock prices further down. The slew of measures announced by the Centre in September helped stabilise the benchmarks, but the earnings of most sectors have been hit by the ongoing slowdown.

How sectors fared

The auto sector, that had been the torch-bearer for the market rally since 2014 took a hard knock in 2019, with a sharp decline in sales of two-wheelers, passenger cars and commercial vehicles (CVs), due to a host of reasons, including tightening credit following the IL&FS crisis, the changeover to BS-VI vehicles from March 2020, an increase in axle load rules for CVs, and the introduction of mandatory long-term third-party insurance. With the contraction in earnings of all auto companies, the BSE auto index lost close to 14 per cent in 2019.

The FMCG index is also down marginally by 4 per cent as slowing rural consumption and lack of pricing power impacted corporate bottom- lines.

The consumer durable index, however, managed to put up a good show, led by stocks such as Whirlpool, Titan and Blue Star.

This seems to imply that consumption as a theme cannot be written off yet.

The metals index, too, was hammered in 2019 — down 16 per cent — largely due to global headwinds caused by the US-China trade war and a lower government capex, affecting domestic metal demand.

Banking stocks witnessed some bargain-buying as lower slippages improved earnings and core performance improved slightly. Real-estate stocks, too, witnessed buying interest.

Both the banking and the realty indices rallied by more than 20 per cent each.

Valuation: Fully priced

The Sensex is currently trading at a PE multiple of 29.5, far above its five-year average of 22.8 times. Similarly, the Nifty 50 is trading at a trailing 12-month PE multiple of 26.6 times, compared with the five-year average of 22.3 times.

While the indices look pricey going by head-line numbers, a closer look at the components of the Nifty 50 index reveals that the valuation of many stocks have corrected significantly, making value emerge, even in the large-cap space.

Investors have been chasing high-growth stocks such as Bajaj Finserv and Bajaj Finance, and defensives such as Hindustan Unilever and Nestle, making these stocks trade at high PE multiples.

But many of the other Nifty 50 components are trading well below their three-year average PE multiples.

It also needs to be noted that the PE multiple of the BSE mid-cap index has reduced from 40 times, towards the end of 2018, to 30 times now. Similarly, the BSE small-cap index PE has corrected from 331 times (due to earnings growth lagging the stock-price rally) to 58 times now.

While these smaller stocks are not exactly cheap, some rationality seems to be returning to their valuation, given the incessant correction over the past two years.

What’s in store

As we mentioned in the beginning, the decline over the last two years has corrected a significant part of the excesses in stock prices and the valuations have become more rational in many pockets.

The factor favouring markets at this point is liquidity — from FPIs and mutual funds to pension funds. But given that these institutional investors are converging on the top 200 stocks, that is where the maximum safety lies, for a conservative investor. If you are more adventurous, the stocks you can consider are discussed in the adjacent piece — ‘5 themes to bet on in 2020’.

Corporate earnings are unlikely to improve significantly, at least until the second quarter of FY21. But a revival in consumption- oriented sectors and government spends can give a kicker in the coming months. The low base effect is also expected to aid earnings growth.

Given the all-pervading gloom, most of the bad news appears priced-in. While global headwinds can cause volatility, this may be the time to accumulate stocks from a long-term perspective.

Also read | Big story: Which stocks to pick in 2020

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