We expect a much better 2020 than the narrow market of 2018 and 2019, where only a handful of stocks performed well. This is because of an evident reduction in the risk profile of equities and businesses, led by corrective and supportive measures announced by the government and stability in world economy. The government is very concerned about the slowing economy and is prepared to support as required. Here are some of the steps that have already been taken by the Government. Surcharges on FPI/Trust have been reversed PSUBs have been recapped and consolidated. Support has been provided to Housing and NBFCs sector with liquidity. Tax relief is offered to start-ups. Add on depreciation of 15% for new vehicles and the ban on the purchase of new vehicle by the government departments to replace old ones, has been lifted; Huge corporate tax cut of 10% for existing and 20% for new capex are big reforms to boost FDI and private spending. Stimulus and incentives were announced to uplift exports and realty sector. Plans are to double capital expenditure on infrastructure in the next five years while the monetary policy is very accommodative. We expect such transformative measures to be enhanced further in 2020-21 Union Budget with a boost in the equities culture with tax incentive and reduction in direct tax for household.
Though the start to the year has been very volatile given needless confrontation from both the sides (Iran for escalating tension in Gulf region and Trump to manage personal threat from impeachment and Presidential election in November 2020). But the market is sensing some ease in the tension due to strong communication from world leaders to counter the situation. In the short-term the market will be careful given limited room to grow due to premium valuation and miniscule improvement in business. Apart from this, the global risk has reduced in 2020 with likely trade deal between US-China, Brexit and in anticipation of improvement in the world economy. The interest rate in US has peaked for the medium-term, it has reduced by 100bps to 1.8% in the last one year. FOMC is unlikely to increase FED rate in CY2020 and will wait till the economy flourishes. This is positive for emerging markets, which will cut interest rate and support their economies. This will increase the possibility of FIIs to invest more in EMs in the next two years.
Our target for Nifty50 is 12,700 which is only 4.4% up from 12,168 closing as on 31st December 2019. This is based on assumption of 15% EPS growth in FY19 to FY22 based on P/E of 17.5x on one-year-forward-basis on EPS of 31st December 2021. We feel the room for the main indices to grow may be limited since valuation for super large stocks are very high. But tailwinds will be more on other value stocks and upcoming sectors. We also feel that more actions will be seen in mid and small caps given likely uptick in economy and improvement in the risk appetite for corporates and investors.
The factors which can delay the benefits to the economy and impact the performance of equity market are; Economy is still fragile which could delay the quantity and timeliness of benefit. Fiscal position is weak, impacting government spending and investment in infrastructure. Government’s income of 2020-21 will depend a lot on divestment, spectrum sales and dividends which provides instability to fiscal framework. GST system needs a revamp while any increase in taxes may impact sentiment, inflation and profitability of business. NPA resolution process can take time to clean-up the system which will impact recovery of the economy. US-China trade and Brexit deals are still under progress and geopolitical risk can enlarge. These are known factors and have eased a lot, market risk has reduced and anticipation is solid that the scenario will improve further going forward.