Equity markets have shown some improvement since September 2019. The BSE Sensex has moved up by 14% since then, broader markets index, Nifty 500 has risen 10%. However, a broad-based rally continue to elude the market. What is in store for the markets and equity mutual funds in 2020?
For the calendar year 2019, the broader market which is up 10%, earnings growth has also picked up, and the earnings growth for most of the companies would be in that range only. The earnings growth has been boosted by the tax cut that has happened for the corporates in September 2019. For the current calendar year 2020, I expect the broader markets, let’s say, the Nifty or BSE 500, to deliver 15% to 18% PAT growth and in line with the PAT growth, I believe the markets should also show similar returns.
We have seen the earnings growth of corporates almost matches the returns of the markets. If you look at the data for last 20 years, or 15 years or 25 years or any long time period, GDP and earnings growth and the market performance have been extremely correlated and very similar to each other with the longer term average of 12% over the last 20-25 years and therefore, seeking the correct valuations which are fair and reasonable and constant, ideally speaking, the earnings growth or the PAT growth of a company should translate into the performance.
However, the disclaimer is that this correlation is valid over the longer terms, but it might not match every year. Every year we will see a lot of volatility but longer term basis, the correlation hold true.
Mutual fund investors have sailed through a highly volatile stock market in the last two years. Many of them are worried about the low returns their mutual fund investments offered during this period. What is your advice to mutual fund investors in the New Year?
The market always has a patch of good performance and probably it also runs through a rough patch of corrections and volatility. For every investor in the market, the ideal time is that the markets have not done well in the past one or two years when it has seen a correction. I say so because when the markets are rough, valuations become cheaper and the probability of making money in markets in the next one or two year become higher.
For instance, if you are investing at the time period when the market is at its all-time high, the chances of returns in the next 12 months could be slightly lower since the valuations could have also become high. But we have seen that the broader market in the last two years has not done well, particularly mid- and small-caps and this is a factor of very poor performance in the last two years and with earnings growth picking up and valuations becoming cheaper, the next one year, I think the market performance would be much better. From the timing perspective, I think this is a very good time for investors to come to the market.
If you see the last 15 years of mid cap performance history, there has been no two simultaneous years where mid cap index has been negative. So, after a year of negative performance in 15 years if you see, the mid cap has always bounced back with positive returns. This time we have seen two bad years CY18 and CY19 and therefore the chances of 2020 becoming a good year for mid and small caps is extremely high.
Despite the hiccups in the stock market, many new investors are still getting to into equity mutual funds. What is your advice to them?
My advice to new investors is that first they should understand their own returns and risk requirements and select the funds appropriately. For a conservative investor, for instance, who want steady return and low risk, probably, dynamic funds or balanced advantage funds are good.
For an investor who has fairly decent risk appetite who wants slightly higher returns, a large cap fund is good.
For an investor who is seasoned and who is willing to take risks, can invest in mid and small caps.
The primary advice is not to time the market. The best time is to invest through SIP so that the timing part of the market gets eliminated.
Another advice would be that the investments should be made only if the investor is ready to hold the investments for over two or three years. If someone has a near term requirement of funds, I would not advise investors to invest that money in equity market given the volatility.
The much anticipated revival of the mid cap and small cap segments is still nowhere in sight. Should investors add more mid cap and/or small cap mutual funds to their portfolio given that everybody still holds positive outlook for them?
Definitely the outlook is positive for small caps and mid caps after two years of consecutive underperformance and valuations becoming cheaper. From the timing perspective, it is very good for investors. But those who invest in small caps and mid caps, should understand that the time horizon for holding this funds should be longer at least two to three years. If they hold their investments for five years, they should know that there would be occasions of big positive returns and patches of underperformance and volatility also. So, the investor should be prepared for rough patches as well.
I believe diversification is important. An investor should allocate a portion of their money to large caps and multi cap and mid caps. So it should be allocated proportionally in all these.
What is your expectation from the budget this year? Do you see any major announcements for mutual funds?
The primary expectation from budget this year is that there should be a cut in the income tax rate for personal income, having seen a corporate tax cut in September which amounted to almost Rs 1,45,000 crore of revenue foregone for the government and a big relief to corporate. General expectation is that individuals would also get a rate cut this time.
I believe if it happens, it will be good. Though the ability of the government to do this is limited because of fiscal constraints, but as the willingness is high.
What I believe is that the government intends to arrest this slowdown and do something to revive demand and consumption but my advice would be that instead of cutting personal taxes significantly, a portion of the incentive or cuts should be given to directly propel demand.
If you cut income taxes, then there would be a section of people who invest in fixed deposit or other debt or would save it or would not even use it. But if you propel demand by giving for an example for Rs 10 lakh car, you waive off 2 lakh as discount. So, if there is a 20% discount incentive for buying a new car, it will increase demand for cars. Similarly, in housing, by giving discounts or lowering the interest rate. So, these benefits will come only when the product is purchased or consumed so that will give a big boost to consumption .The main problem of the economy today is that the consumption demand is lagging. My expectation is that if the government addresses the consumption and demand problem of the country, I think we will see spectacular growth.
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2 Comments on this Story
Deepak Soni370 days ago
Motilal Oswal people are highly untrustworthy and absolutely vague. I have always stand cheated whenever acted on their opinion and so is with several of my friends. I am expressing my view here so that other readers instead of relying upon views of Motilal Oswal people can take their independent decision.
Hemant Pisat371 days ago
Now that government has done wonderful job for corporates; Industry feels tax reduction for consumers isn't going to be a great idea.