Year in Review: Market ends on high, thanks to tax cut, US-China trade deal

Debt-laden companies get heavily punished amid uncertainties over economic growth

The benchmark indices — Sensex and Nifty — are ending 2019 on a strong footing, with the two gaining 15 per cent and 12.8 per cent, respectively, even as the domestic economy is slowing down.
 
Both Sensex and Nifty touched their all-time highs of 41,810 points and 12,294 points, on an intra-day basis on December 20.
 
According to market participants, the corporation tax cut in September, along with signs of a thaw in the US-China trade stand-off, pumped up the markets in the second half of the year.
 
It was a highly-volatile year, though, with traders caught at the receiving end of market whipsaws in the absence of a clear trend. In the first half of 2019 (between January and June), the Sensex gained as much as 12 per cent, only to give up almost all its gains by September. However, the tax cut reversed the fortunes.
 
A broader market rally remained elusive. Because of acute polarisation and large institutional money sticking to “quality” names, even the frontline indices saw few stocks contributing to the bulk of  the gains.
 
Only 19 of the 30 Sensex stocks gave positive returns. Only 14 Sensex stocks beat the index. For the 50-stock Nifty index, half the constituents gave negative returns year-to-date. Only 18 managed to beat it. The Nifty Midcap and the Nifty Smallcap index declined 4.5 per cent and 10 per cent, respectively, on a year-to-date basis.
 
“Large-caps are preferred during an economic slowdown as investors prefer safety over returns,” said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies.
 
In a note, Edelweiss Research said economic slowdown and continued earnings recession added to investor woes. As a result, investors stuck to  stocks where scope of sharp downside was limited.
 
Meanwhile, companies saddled with a large debt pile remained under pressure, still feeling the after-effects of the liquidity crunch in the debt markets after the IL&FS default. Concerns around promoter pledging and corporate governance also took a toll on some of the well-known business houses.
 
Among the Nifty stocks, the bigger losers for the year included YES Bank (-74 per cent), Zee Entertainment (-36 per cent), Gail India (-34 per cent), Mahindra & Mahindra (-33.2 per cent), and Vedanta (-23.59 per cent), whereas the top gainers included Bharti Airtel (60.49 per cent), Bajaj Finance (60.42 per cent) and ICICI Bank (51 per cent).
 
“Everyone underestimated the impact of the non-banking financial (NBFC) crisis, which led to a virtual freeze on lending. The fact that it coincided with NPA recognition did not help matters. Banks were also unwilling to step in to bridge credit gap,” said Jyoti Jaipuria, CEO, founder, Valentis Advisors.
 
The concerns over firms relying on the debt markets — especially NBFCs — got aggravated with multiple rating downgrades. NBFCs found it difficult to meet their debt obligations due to high levels of short-term liabilities against assets or loan advances structured over longer tenure.
 
Further, corporates taking loan-against-shares were also left in the lurch, as value of promoters’ pledged shares came under pressure amid overall market selling.
 
“Companies with weak fundamentals were heavily punished as investors didn’t want to take any chances in firms grappling with mounting debt pressure,” said an analyst.
 
The optimism triggered by the Modi-led government’s second-term soon fizzled out as economic realities begin to weigh on investor sentiments.
 
Gross domestic product grew just 4.5 per cent for the September quarter, the slowest in over six years. In November, Moody’s revised India’s rating outlook. It said economic growth could remain materially lower, and the government could face significant constraints in keeping fiscal deficit under check.
 
Lack of stimulus package, surcharge on foreign portfolio investors (FPIs), and buyback tax in the Budget in early July were other pain points for investors.
 
The Sensex dropped as much as 9 per cent between the Budget and the corporation tax cut in September. The sharp fall came on the back of  Rs 38,000 crore being pulled out by FPIs in between July and September. Mutual funds provided some counterbalance. However, their buying moderated as investors pulled out funds.
 
More recently, protests against the Citizenship Amendment Act and the proposed National Register of Citizens (NRC) have even got foreign brokerages worried.  “The powerful public backlash will exacerbate domestic demand prospects over coming months,” CLSA said in a note.

 
Meanwhile, measures have been afoot to inspire a revival. The Reserve Bank of India (RBI) has recently initiated Operation Twist to improve transmission of lower policy rates by banks. The RBI has cut the benchmark policy rate by 135 basis points this year.
 
The government has also announced merger of some of the troubled public sector banks and expressed intention to privatise public sector enterprises.