5 Themes To Bet On In 2020

The decline in stock prices over the past two years has created some lucrative opportunities. From buying large-cap cyclicals to bottom-fishing, here is how you can go about your equity investment in the new year

- Lokeshwarri SK

As we step in to the New Year, there is a feeling of gloom caused by an economy that seems to be spinning out of control, political unrest and equity portfolios smeared with red.

But it needs to be remembered that market bottoms are typically formed when there is an all-pervasive gloom. As mentioned in the adjacent piece, the ongoing correction that has already lasted two years has created some great buying opportunities for the long-term investor.

While volatility is likely to persist in the next few quarters, investors can use this phase to buy stocks. Here are some themes that can be considered for 2020.

Cyclical large-cap stocks

The demand dynamics of the listed stock universe has undergone a sea change over the past five years, with excessive demand for large-cap stocks, which are the top 100 stocks based on market capitalisation. The steady demand limits the downside risks in these stocks, while stocks that have reported decent earnings growth have been accorded rich premium by investors.

The top 100 stocks grew their market cap by 13 percent in 2019, and the top 10 stocks have witnessed 20 percent growth. But there is opportunity in this space, too.

While stocks with robust near-term prospects are trading at rich valuations, some cyclical stocks with near-term growth concerns are available at far cheaper prices.

For instance, Power Grid Corporation is trading at a trailing PE multiple of 7.8 times, compared with its three-year average PE of 15.3 times due to lower electricity generation in 2019 and a fear of greater competition going ahead. But considering a large project pipeline, superior execution capability and good revenue visibility, it continues to be a good long-term bet.