Large caps seen remaining dominant in India in 2020

[MUMBAI] India's largest stocks are likely to be winners again in 2020, after propelling the benchmark equity index to its fourth straight annual gain.

Analysts expect gains in the S&P BSE Sensex in the new year to be led by just a handful of big names, similar to 2019, as uncertainty around a slowing economy is likely to continue driving investors to the safety of quality stocks.

"Investor focus is unlikely to shift soon from the few high-quality names which continue to steadily grow faster than the economy," said Dipen Sheth, Mumbai-based head of institutional research at HDFC Securities Ltd. "The foreign flows, too, favour top players."

Economic growth slowed to a more than six-year low of 4.5 per cent in the July-September quarter. That hasn't stopped the Sensex from climbing nearly 16 per cent this year, to a succession of record highs to cap a fourth straight annual gain.

However, only three companies have accounted for 65 per cent of all of the advance: Reliance Industries Ltd, ICICI Bank Ltd and HDFC Bank Ltd.

"We expect narrow market performance to continue, as economic uncertainty continues to push funds into the 'safe' stocks, resulting in higher market concentration," said Neelkanth Mishra, a Mumbai-based analyst at Credit Suisse.

GLOBAL FLOWS

A gush of cash from global funds has helped drive the record-breaking stock rally, as overseas investors bet the worst of the economic slowdown may have passed. Foreigners have pumped US$14 billion into India's stocks this year, the highest inflow since 2014.

"Global flows are likely to be supportive as well," Mr Mishra said "A significant part of foreign portfolio investment holdings in India appears to be longer term in nature or benchmarked."

EARNINGS RECOVERY

Earnings growth for India Inc is another factor seen support stocks in the new year. A possible economic recovery, lower corporate tax rate, clean up of bad assets at banks, above average monsoon and accommodative central bank stance support the outlook.

"Growth has likely bottomed out," Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs Group Inc, said in Mumbai this month. "We see it as one of the top three Asian markets for earnings growth next year."

Mr Moe said he expects profit growth to expand to 16 per cent in 2020 from 12 per cent this year. That's his best earnings forecast for a country in the region next year, after South Korea. Among sectors that may drive this recovery are financials, consumer-oriented companies and industrials.

While earnings are improving, valuations have jumped. The Sensex is trading at 19 times 12-month forward earnings estimates, above its 10-year average of under 16 times.

BROADER MARKET

Smaller stocks have lagged the overall market rally, with the NSE Midcap 100 Index down over 5 per cent and the Nifty Smallcap 100 Index down nearly 12 per cent year to date. Optimism around further government reforms and an economic recovery could help build a case for a catch-up by the broader market.

Valuations for mid-caps are reasonable and small-caps have bottomed out, said Jaideep Hansraj, chief executive officer at Kotak Securities Ltd.

"The small caps can show material outperformance, if the economy revives," he said.

BLOOMBERG