Dark clouds were gathering on the horizon for the Indian economy in 2020 according to the document. After a period of disruption and reset in the economic paradigm since 2019, growth was expected to remain below 6% with high inflation and volatility in the markets. Globally as well, economic growth was projected to slow down with increased uncertainties. The investment strategy recommended remaining risk averse with an underweight allocation to equities and overweight allocation to precious metals and debt.

1. “Dark clouds gathered on the horizon”
“I see a very dark cloud on America's horizon, and that cloud is coming from Rome” - Abraham Lincoln

2. Key message
Outlook for 2020
Investment strategy for 2020
2019 in retrospect

3. • Indian economy witnessing a major Reset in terms of technological evolution, regulatory framework,
trade structure, development model and federal structure.
• The businesses and markets may continue to face material disruption for next few years, as the new
paradigm emerges and demand and supply dynamics find a new equilibrium.
• The opportunity for survivors shall be significantly larger in comparison to earlier reset periods
Near term impact
• Asset prices may continue to fluctuate as the investors and consumers try to assess the fair value.
• Mini bubble shall keep erupting as crowd possessing liquidity tries to capture the initiative 2020 may
witness.

4. 2020: India
 Macro weakness to persist. GDP/GVA growth to stay below 6%.
 3/4th population may face stagflation – low to negative wage growth & rising cost of living
 Market volatility to rise sharply due to erratic flows and corporate performance
 Overall equities to remain under pressure. Market breadth may remain poor.
 Real interest rates to ease marginally. INR to weaken.
 Liquidity conditions to remain comfortable.
2020: World
 Growth to slow down
 Volatility to remain heightened
 Uncertainties to intensify further due to political and geopolitical conditions
 Monetary policy shift to keep markets anxious
 Emerging economies to come under pressure, even if flows improve
 Industrial metals and oil to remain under pressure, precious metals may gain

5. • The liquidity fueled global economic expansion looks tired. The deceleration that started in 2018, may not reverse in 2020.
• The deceleration in Indian economy may get arrested. But a broad based sustainable recovery is highly unlikely. The recovery may be
shallow and limited to select pockets.
• The asset prices may remain under pressure.
• Overall equity returns to remain poor. Current bond yields to sustain. INR may weaken. Real estate prices may correct further.
• Corporate earnings to grow in single digits. Nifty returns may be + 8% for the year. Equity risk reward clearly negative.
Strategy: Risk averse.
Asset allocation: Underweight Equity (50% allocation); Precious Metals 25%, Debt 25%
Equities: Prefer IT, Insurance, Financial Services, Agri input and large Realty sectors. Underweight on consumers (especially FMCG staples
and media).
Debt: 75% accrual; 25% long duration. Duration allocation to increase to 100% if benchmark yields rise above 7.5%.

6. India Macro
• Growth: Annual growth rate to range between 5.8 – 6.2%, assuming no major fiscal stimulus.
• Inflation: CPI to average over 4%, with some seasonal spikes. Core inflation to rise moderately as output gap fills and
wage pressure rise.
• Interest Rates: Expect benchmark yields to average above 6.65%.
• Exchange rate: USDINR may average in 72.5-73 range, and move in 70-76 range.
• Fiscal deficit: FRBM targets may be relaxed and fiscal deficit may exceed 4%.
• Current account: CAD to average around 2.2% of GDP in 2020.
• Investment: No material rise in investment . Both public and private capex to remain poor, though marginal
improvements may be seen due to low base.

8. Revenue collections to remain below par

9. Public sector investment to remain low

10. Large output gap to restrict private investment

11. Rising unemployment and poor wage growth to limit consumption growth

12. India markets
• The financial market may witness higher volatility.
• The returns from Indian equity may be in the range of + 8%.
• Private investment and consumption both should remain subdued.
• Global commodities will show a mixed trend. Precious metals may do better while industrial metals and energy prices
shall remain under pressure.
• Exporters to continue underperforming.
• Bond yields may touch a high of 7.25%, and average above 6.65% for the year.
• Real estate prices may remain under pressure in most geographies.
• INR to weaken, may average in 73-74/USD for the year.

13. India Equities
•Earnings: The earnings drought may extend to FY21. Expect significant earnings downgrade and de-rating of PE multiple.
•Technical: Nifty may move in a very large range this year. On the downside, it may trade in 9730-10564 range (Worst case
scenario). The upside though appears limited to 12700-13111 (Best case scenario) range. The risk reward therefore is
clearly negative at present.
•Flows: Expect flows to remain erratic, despite expected resumption of QE in the developed world.

15. Current earning forecasts too optimistic, may see sharp cuts

16. Current earning forecasts too optimistic, may see sharp cuts

17. *2019 data till 24 December 2019

18. Nifty may end 2020 with + 8% change

19. (a) The entire equity allocation shall remain invested.
(b) Overweight on IT, Insurance, agri input and large Realty sectors
(c) Equal weight on Financial services sectors
(d) Underweight on consumers (especially FMCG and media).
(e) Neutral position on other sectors.
(c) Avoid active trading in 2020.
(d) Gold allocation will be mostly invested in gold bonds.
(e) A relatively weaker INR (Average around INR72.5/USD) and stable rates assumed in investment decisions.
Any change in these assumptions may lead to change in strategy midway.

21. What will change market outlook and investment strategy?
• Material tightening in trade, technology, and/or climate regulations
• Material escalation on northern borders
• Prolonger civil unrest
• Stagflation engulfing the entire economy
• More exits from EU
• One or more Indian states or large PSU failing to honor its debt

22. If the 2019th year of Christ is to be described in one word, it
would be – “Befuddling".
Like 2018, the year 2019 also started with great hopes, lost momentum early before hopes were raised
again in August-September. The year is ending with despondency all around, except in the headline Nifty
and Sensex number.

23. Some key events
 The Sino-US and US-EU trade wars intensified, before easing a bit towards end of the year.
 Central Banks in US, Europe, Japan reversed their monetary policy stance again and signaled resumption of QE.
 Attack on Saudi oil facilities led temporary spike in oil prices. OPEC keeps Brent crude above US$60/bbl
 Global growth continued to slow down marking end of longest expansion in past four decades.
 Unexpected victory of conservative party in UK elections, pave the way for BREXIt in early 2020.
 Stock markets recorded decent gains across the world, despite growth slow down.
 New sectors of stress emerged in Indian economy as the IBC resolution process gathers steam. RBI pauses after cutting the policy report rate by
135bps. Begins own version of Operation Twist to improve transmission.
 PSU Bank consolidation gathers pace. NPA level come down after recapitalization and recovery from IBC process.
 FPIs turn big buyers in Indian markets after four years.
 BJP scores record victory in general elections, but suffers major losses in state elections.
 The relations with neighbouring countries, especially China and Pakistan worsen materially.
 The country erupts in protests against Citizenship Amendment Act 2019 and anticipated NRC.

24. Seasonal spike in food prices lead CPI higher

25. Investment, consumption falls as credit growth shrinks

26. Business and Consumer Confidence collapses

27. Policy easing and abundant liquidity did not help growth

28. External situation weakened

29. RBI intervention keeps INR stable

30. Policy transmission remained weak

31. Fiscal target ambitious, need to be adjusted

32. Earnings continue to disappoint

33. Market valuation not attractive for benchmark indices

34. Yield gap negative for equities

35. Broader Markets underperform majorly

36. Private Bank lead BankNifty outperformance, Small-cap capitulate

37. Realty perform best. Media & PSU Banks the worst

38. Huge divergence in stock performance, indicating a structural shift in business environment
No stocks discussed here should be construed as investment advice

39. FPI flows at 5yr high, DII flows slow down

40. Commodities volatile, but ended the year as high note

41. US Markets ending the year at Highest note

42. Indian Equity performance in line with troubled UK, HK etc

43. Central Banks reversed their policy stance

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