Top 10 Large-Cap And Mid-Cap Stocks To Buy For 2020 (Up To 40% Upside)

OUTLOOK FOR 2020 BY KARVY

2019 was an eventful year with events like markets hitting a record high and re-election of Modi with a strong electoral mandate. However, an economic slowdown has dented the euphoria of markets, the NBFC crisis, consumption slowdown have been dampeners.To counter this, the RBI has loosened monetary policy significantly and the government has initiated reforms like a cut in corporate tax rate. There are some green shoots visible in the economy.

The PMI for the month of December 2019 gives reason for hope as it expanded to 52.7 in December 2019 from 51.2 in November on a seasonally adjusted basis. Historically it has acted as a leading indicator. While it is too early to celebrate, there are signs that the economy may have bottomed out. We have held the view that Q2 or Q3 is likely to form the bottom of the economy and Q4 is likely to witness a pickup. We also believe that inflation is likely to decline by the middle of the year and is unlikely to be a major issue.We believe the recent pick up in markets is on account of the anticipation of a recovery.

Markets tend to be a couple of quarters ahead of the economic cycle.

We believe that the mid caps are likely to lead the rally going forward and large caps maybe range-bound. Overall the first half should be good for equities though in the second half global markets may worry about a global recession and the equity markets maybe range-bound in that part. Overall, we expect Nifty to end the markets 10% higher at around 13500 levels and midcaps should be higher by 20% to close at 20500. With regards to outlook for key sectors we believe it is going to be mixed.

Due to the NBFC crisis, real estate was adversely impacted as sub-par developers struggled for funding due to cautious approach by lending institutions. Due to government’s constant push for affordable housing, the new launch activity across thetop seven cities of India increased by 21% in 2019 with 40% contribution from affordable segment. The housing sales were up by 5% at 2.61 lakh units.However, commercial portfolio witnessed steady lease rentals and healthy demand.We expect 2020 to see large players further strengthen their position.

FMCG sector on expected lines underperformed broader indices recording a flattish performance due to tepid volume growth reported by large FMCG players during CY2019. Even on margins front, it reported tepid performance despite benign raw material prices. However, in the near term, we expect better numbers to fall through with harvest season upon us (70% of Indian rural households depend on agri) and second round impact of government spending. We expect increased lending and revival in rural sentiments to aid consumer spending for the sector during 2020.

Capital Goods sector was impacted by slow project execution in 2019. The tepid performance of the Capital Goods sector was unevenly distributed with the outperformance of short cycle orders in food processing and cement sectors when compared to slow moving large power projects. In 2020, we expect Capital Goods sector to outperform other sectors on the back of strong outstanding order book and increase of govt spending in the infrastructure sector.

During CY2019, Nifty IT underperformed Nifty by 320 bps. This in large can be attributed to Infy’s decline of 9.2% in Q3FY20 owing to whistle blower allegations and tepid performance of TCS and Wipro. Performance of IT stocks during CY2019 lagged Nifty’s performance due to concerns over weak client spending due to weak global macro set up and weak commentary on Retail, BFSI and Auto verticals by large IT players. key factors to watch during CY2020 include commentary on demand environment, deal pipeline; pricing pressure, if any, deal conversion and ramp ups and margin performance.

Stepping into 2020, we believe Budget 2020 will be the torchbearer for economic revival and markets performance as well. While market scaled to new highs during 2019, the rally was very narrow and mostly due to technical factors like global liquidity, outperformance of heavyweights like Reliance and HDFC twins. Despite such narrow rally, we expect tax cuts announced during 2019 to anchor index valuations to current levels. Since economic measures work with a lag, we believe the measures of the past year coupled with measures to be announced in Budget 2020, will help economic revival and help index earnings to catch up.