Dear Advisory Client,
Wish you a Very Happy New Year.
The equity markets are entering 2020 on a high note, at record high levels. Markets have rallied against the backdrop of weakening demand, weak economy and global economic uncertainty. However, the market rally has been extremely narrow with banks leading the markets higher. Bank Nifty has gained 13% over the last three months while Sensex & Nifty are higher by 8.5%.
Banks have rallied on hopes of more stressed asset resolutions after the Essar Steel Rs 420 billion resolution, RBI keeping down rates and keeping liquidity high in the system and hopes of protection against recognition of bad loans.
On the other hand, credit growth has fallen to 8% levels and bad loans are still a big issue. Banks are focusing on retail lending but given a weak economy, bleak industrial prospects, lack of investments, loss of job and distress in rural economy, how long will the retail credit profile hold up is a big question mark.
Any debacle in the banking sector can puncture the market rally.
On the global front, markets have rallied to record highs on US-China trade deal, improving economic data from China and easy money conditions created by central banks. The markets staying at highs and surmounting new peaks will depend on whether the global economy can pull itself up, and this has to be led by China.
Uncertainty persists domestically and globally. On the domestic front, there is no visibility on what can lead demand higher while on the global front, a trade deal by itself cannot undo the structural issues faced by China and the other parts of the world. Geopolitical issues too are many and can cause further uncertainty.
As far as market indicators go, there is no alarm seen in the global markets on various parameters. On the domestic front, high credit spreads are a huge cause for worry but this has not affected the market rally so far.
While we enter 2020 on a promising note, the year looks to be digital, with either a huge bull run or an extremely sharp sell off. The hope is the latter and the trend will be only known in the next few months, with demand pick up being the primary indicator.
There is enough time to position portfolios if there is visibility of a bull run and if risk of a sell off passes over and such positioning can generate returns to last for a few years. Patience will be the name of the game in 2020.