Year 2019 ended on a sour note. Political protests; Net shutdowns; violence in several states; the perception that India is losing its secular character and democratic sheen; all these are bad for business. Every major institution is downgrading India’s growth prospects. However, the stock market is still up, though the indices are propped up only by a small bunch of rising stocks.
This lack of breadth could mean a collapse if the mood becomes more pessimistic. Does this mean that you should stop investing in the stock market? No! There could be a crash and there may be a long bear market. You must see that as an opportunity to lower portfolio acquisition cost.
Here are some thoughts. First, the Indian economy has a large domestic market, which is currently in bad shape. Consumption is down; investment is down; the government is more focussed on politics rather than economic policy.
Stocks focussed on the domestic market will be impacted negatively. They will declare poor financial results as they have declared poor results for the past six quarters too. This poor performance should, sooner or later, lead to corrections in the share price. The smart investor will look for entry opportunities in such stocks only once prices fall to attractive levels.
Second, India has a fair number of stocks that are for various reasons, almost immune, to domestic factors. These are corporates with global profiles, such as the IT and Pharma industries, and other exporters, as well.
Some other companies operate in sectors (such as metals and mining) where the global factors are important. What happens on the London Metal Exchange, or in Chicago’s commodity exchanges affects steel, copper, aluminium producers far more than what happens in India. Others (Tata Motors, Bharti Airtel, for example) have large subsidiaries abroad. The profits of refineries (BPCL, Reliance, HPCL, IOC) depend on international oil and gas prices.
Let us call these companies the “globals.” There are periods when globals do well and periods when they do badly, but their performance is dependent on external factors. Many of these companies will do reasonably well in 2020, given that the global economic growth is expected to continue.
The geopolitical risks that could derail global growth include a continuation of the US-China Trade War, which has pushed down commodity prices, the shape of Brexit and its impact, more conflict in oil-producing regions like the Middle East, the possible impeachment and removal of the US President and the attitudes of influential central banks. But most institutions believe world growth will be positive in 2020 even though there will be a slowdown and there is that laundry list of geopolitical risks.
Poor sentiment about India coupled to optimism about the rest of the world could mean a sell off from Foreign Portfolio Investors. That would put pressure on the rupee. This would further boost the prospects of globals since they become more competitive when the rupee is weak.
India investors should therefore, be looking at positions in the globals. They should also be looking at taking exposures in overseas assets by buying into funds that invest abroad in the European and US stocks and treasuries. Again, a weaker rupee means returns on such investments and these would be a hedge against an Indian bear market.
Sometime in the future, the Indian economy will recover momentum. I have no idea how long that will take but it will happen. As and when it does, there could be a big bull market. But there may be a big bear market before that. Historically, the Indian stock market has rarely stayed in the doldrums for over two years and the returns is always handsome for those who invest when prices are down.
If you are holding diversified mutual funds, continue with SIPs and consider increasing exposure if the market drops 20 per cent or more in 2020. If you are buying a stock next year, ask a few questions. Are you paying a reasonable price, given long-term growth prospects? The second question is, are you prepared to hold, if you do not get returns for two years? The third question, are you prepared to hold if the price halves? Do not buy if the answers are not “yes.” Happy 2020 and good luck with your investments!
The author tracks economic, behavioural and corporate trends, hoping to gauge good avenues of returns