Mid-cap, small-cap indices to outperform benchmarks in 2020: HDFC Securities

HDFC Securities Ltd said on Thursday that mid-cap and small-cap indices are most likely to outperform the benchmarks in 2020 after two consecutive years of under-performance.

"The markets are getting polarised day-by-day in terms of volumes and market capitalisation. This means that a vast portion of portfolio of retail and high net-worth individual (HNI) investors do not reflect the bullishness displayed by Nifty," said the leading stock broking company.

Investors are now selling stocks and mutual funds at a faster pace than earlier in the present age of disruption.

One of the reasons for this is also the low difference in tax rates between short-term and long-term capital gains, said HDFC Securities adding that investors are also shaken by frequent changes in the composition of Nifty and Nifty mid-cap indices.

 

"The composition of the trading pattern at the exchanges is slowly changing with institutions doing the investment part, proprietors providing the liquidity and retail and HNIs playing the intra-day or extreme short-term game."

The company said emerging markets as an asset class could start performing better over the next few years after under-performing over the past ten years.

This will be driven by a slowdown in developed economies, demographic dividends in emerging economies and falling crude oil prices. "At the same time, we have not seen the last of US-China trade tiff, though for the time being the two countries have come to a temporary truce."

Domestically, said HDFC Securities, higher inflation readings before the next Reserve Bank of India (RBI) policy meeting in February and any announcement of significant fiscal expansion in the Union Budget 2020-21 can lower the possibility of an interest rate cut.

Interest rates across the globe may be steady for some time unless continued slowdown forces resumption of rate cuts, it said. Given the easy money policy followed globally, foreign portfolio investment (FPI) flows will be healthy in the early part of 2020.

HDFC Securities said its Budget expectations include upward revision in the direct income tax slabs for individuals, abolition of long-term capital gains tax on equities and equity mutual funds, setting up of a mechanism for taking over stressed assets of banks and non-banking finance companies, incentives for export units which promote jobs and measures to boost investments in agriculture.

While some green shoots are visible as far as Indian macros are concerned, the clear turnaround in the economy could be in Q4 FY20 or early Q1 FY21. The structural changes undertaken in recent years will help transform the Indian economy over the next decade and maintain growth at strong levels.

2020 could bring global equity returns that are front-loaded as Brexit and trade war fears recede and central banks continue with easy monetary policy. This can also get reflected in India as expectations build-up ahead of the Union Budget and add fuel to the stocks rally.

Any concrete progress in strategic divestment in the meanwhile can also help. "In the run-up, Nifty could see a rise to 12,800 in the first quarter of CY20."

Besides, the asset quality of banks can witness a decisive turnaround this fiscal with gross non-performing assets (NPAs) reducing sharply driven by a combination of reduction in fresh accretions to NPA as well as stepped-up recoveries from existing NPA accounts.

However some recurrence (to a smaller extent) may be seen in infrastructure, non-banking finance companies, agriculture, retail and MSME spaces, said HDFC Securities.

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