As India prepares for a new government in May, domestic equity markets are expected to be turbulent, but most analysts see growth opportunities in fiscal year (FY) 2020.

However, besides the elections, there are several challenges for India equities in FY20—liquidity condition, stability of the rupee, crude prices, the budget for the fiscal year tabled by the new government and the trade war between China and the US.

At this juncture, recovery in corporate earnings growth is also very crucial for Indian markets. Delay in expected corporate earnings, profitability growth and a fractured mandate by voters in the general elections are major concerns for equity markets in FY20, said Harsha Upadhyaya, chief investment officer, equity, Kotak Mahindra Asset Management Co. He, however, expects the market breadth, as well as equity returns, to be better in the fiscal year, as compared to FY19.

Measures initiated by the US and Europe, as also by China, to overcome the economic slowdown are all factors that will be keenly watched by analysts, said Joseph Thomas, head of research, Emkay Wealth Management.

Thomas sees a couple of factors which could be hindrances to markets in FY20. First, liquidity condition in the interbank market is of prime importance, as the deficit is met by the Reserve Bank of India through repos, and open market operations (OMOs). “We need to see the systemic liquidity improving substantially through long-term money for the markets to retain the momentum," he added.

Second, any rise in Brent crude prices holds a threat to the economy with its impact on retail inflation and the current account deficit. A third factor is the likely intensity of the shadows of a global slowdown, with China slowing down to all-time lows, and German and French economies contracting, while Italy is still in a recession. Fourth, the government finances will also be one of the factors to be reckoned with. “Large government borrowings, persistent agrarian distress and low levels of employment are also factors which will impact growth and, therefore, earnings," Thomas added.

As earnings growth remains elusive, analysts said the expectations of a full recovery in FY20 will not be pragmatic. “As widely expected, 20% earnings growth in this year is a bit far-fetched," said Aditya Narain, head of research, institutional equities, Edelweiss Securities. “From consumption perspective, we are beginning to see some pressure, while from the investment cycle we are a bit cautious. As valuations are getting steeper, we see limited upside to the markets till December. Post-elections, we were expecting stimulus both from monetary and fiscal front, but it was done a little ahead of time. The big challenge for the markets will be liquidity."

Another concern that could be hurting local equities is tapering fund flows. “Domestic money has been a strong support for the market. The return of foreign portfolio investors and persistently strong domestic institutional investor are big positives for the markets, especially on the liquidity front. A slowdown in retail flows, especially into mutual funds, may also be a likely damper," said Jinesh Gopani, head of equity, Axis Asset Management Co. Ltd.

Foreign institutional investor money was missing from India for most of FY19. They were net buyers of Indian equities worth $162.29 million in FY19, the lowest in three fiscal years. However, domestic institutional investors (DIIs), including mutual funds and insurance firms, were net buyers of 72,109 crore Indian shares in FY19.

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