Budget, Brexit, POTUS poll? What will really decide Dalal Street’s 2020 run?

For much of 2019, speculation about a possible US recession kept shaking and stirring global financial markets every now and then. Yet, US investors made money in 2019 on wherever they could lay their hands on: from gold to bonds to any other commodity and, of course, the super-hot stocks and even hogs!

This happened as asset classes defied age-old patterns and correlations to deliver solid returns.

But that's not what should interest you. It should be the rally in US smallcaps that Wall Street saw through the year; they delivered 24 per cent. Some analysts on Dalal Street have extrapolate it as harbinger of good times for Indian smallcaps! Of course, they did not see the ominous signs from swelling fiscal deficit, ignored stagnant economic growth and won't count the disruption from BS-VI emission norms.

Hopes, projections and estimations for Calendar 2020 are inconsistent. There are very bullish projections of Sensex topping 50,000, and then there are more moderate estimates of a midcap-smallcap revival, while one camp insists largecaps will carry on with their euphoria from 2018. Yet others say, the market may spend much of the year consolidating time-wise and price-wise.

While that's crystal-gazing, what we know for sure are the events and factors lined up through the year, which will determine the course that the market is going to take. Take a look:-

Union Budget: Union Finance Minister Nirmala Sitharaman belied expectations with her first Budget in July, 2019, so much so that adverse market reactions eventually forced rollback of some measures. She would hope to do better this time, and she better does, because all stakeholders -- be it India Inc, the middle class, small businesses and financial markets in general -- are keeping their fingers crossed. The buzz on the street is about a possible cut in income-tax rates. But to deliver that alongside a large public sector capex that the government needs to deliver to keep the economic engines purring, the Finance Minister has a lot of tightrope walk to do, given the sluggish GST collections and slow progress in strategic sale of government assets. If 5G spectrum auction delivers a windfall, she will feel blessed.

Brexit: January 31 is the date. British Prime Minister Boris Johnson has almost bulldozed through the Opposition walls to realise the much-awaited divorce from the European Union. It's all good till that point. But then begins toughest part, a hard bargain at the negotiations to forge a new trading relationship with the EU, which he needs to complete by October 31, 2020. That bit, and the eventual outcome, will have its share of shocks and swings on financial markets.

US Election: Through the first half of Donald Trump's presidency, a large part of America kept on hoping they don't have to bear with him for the entire term. The House of Representatives impeached him this past December, making him the third American chief executive to face it. But he is certain to survive a trial at the Republican-dominated Senate. Yet, the odds appear to favour Trump’s return to White House in the November, 2020 presidential election. Should that happen, will it make him more protectionist? Will it mean more trade tensions globally? That's something markets will be worrying about.

Trade War: Phase One of the Sino-US trade deal is done, or at least that's what both sides claim. The latest news is that the official stamps will be put on it on January 15. But nobody knows what it contains. Fresh tariffs are off for now and the bickering has eased. But even the diehard optimist realises there is more to the trade dynamics between the world's two largest economies than just some agriculture imports here or a Huawei licence there. Worse still, there is a large intellectual property component to it, which could be an unending bargain. That Sino-US trade ties have been altered for good is anybody's guess. One just hopes it doesn't turn into a cold war -- hunky-dory on the surface, lots of undermining behind the door.

Economic Recovery: Nobody knows what will it take to bring India's economic growth back to 7-8 per cent levels, forget those aspirations for double-digit expansion and the $5 trillion GDP goal. While a reversion to mean is due, the fact is, this downturn is unlike any of the past ones, because back-to-back disruptions in the form of cash ban, GST, RERA, IBC have broken the backbone at very base of the economy -- MSMEs, smaller players in the value chain, unorganised players. The new economy favours big players to grow bigger, makes the middle order struggle and causes minnows to evaporate. On the brighter side, there is demographic dividend and a rapid growth in savings. When a part of that wealth goes into consumption, the juggernaut will roll.

Auto BS-VI: India's once high-flying Motown has been fighting a demand slump for two years now. It originated from a tax and price hike and a steep rise in fuel and insurance costs, and now a major shift in emission norms to two-notches higher at BS-VI threatens to alter the market forever. Cars are going to get costlier and new-age cabbies are changing user habit, making car ownership look burdensome for the GenNext. Meanwhile, government policy has turned decisively in favour of electric vehicles, yet another disruption which is going to make car buyers increasingly doubt longevity of their purchases. Remember, the auto industry has long downstream linkages and they together create lots of jobs.

Monsoon/Inflation: A seasonal spike in vegetable prices and a mild rise in crude oil price stalled RBI's rate-cut spree this December when the markets and India Inc were rooting for it. While policy makers at RBI want to make the nation believe they have room to cut more, maybe in April after watching what the Union Budget contains, the fact is by then RBI will be at the mercy of the seasonal monsoon rains. Initial projections will start coming in, and the MPC will have to wait and watch. Crude oil prices have already risen on talks of output cuts by Opec and allies. Come what may, inflation will return to dominate market discussions this year.

Fiscal Deficit: The signs are ominous already. April-November 2019 fiscal deficit has crossed Budget estimate by 14.8 per cent, a record high compared with the corresponding levels in prior years. And that makes FY20 deficit slippage a big worry. Economists now say fiscal deficit could slip to 3.8-4.0 per cent levels in FY20. Markets by and large have baked that in; the government has tightened purse strings for March quarter. The worry is, it limits FM's wiggle room in the Budget. She needs to spend, but has no money. Should she allow deficit to slip further in FY21, rating agencies will be waiting to pin her down.

Strategic Sales: When the Modi Government first talked about it, there was all admiration for the out-of-the-box thinking. The plan to sell off BPCL created a feel-good factor in the market. The problem is, nothing has taken off. Air India sale went into the backburner and is back again. But a lot of what the economy needs and what the Modi government wants to do will hinge on these asset sales. Expect this to be part of the economic narrative time and again all through 2020.

Earnings Recovery: For years now, this has been one illusion Dalal Street has started every year with. Calendar years and financial years begin with bullish projections about double-digit earnings growth, which gets tapered down to low single digits by the end of the year. The advantage this calendar is a low base last year, and the cleanup that has happened in banks' books. Much of the bump-up that many of the largecap stocks saw through the second half of 2019 was in expectation of earnings recovery. If that doesn't materialise, it's going to cause lot of pain and bring down the indices by several notches.