The year 2019 was expected to be tough owing to both domestic and global challenges but the benchmark index Nifty managed to deliver a decent 12 percent returns.

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While India’s economic growth has slowed down sharply, government reforms such as corporate tax rate cut and respite in US-China trade wars have helped the equity markets to close near historic highs. With a "very constructive market scenario" as the backdrop for 2020, prospects remain promising, said Reliance Securities in a report. However, there are critical challenges of fostering an economic recovery while keeping the interest rates low, it added.

The brokerage believes an economic recovery is at hand, though it stopped short of giving a specific time. Emphasising that banks will continue to be the key earnings driver for 2020, Reliance Securities set its 2020 Nifty year-end target at 13,900, or a 13 percent return, from the current levels.

Reliance Securities advised investors to look at stocks that are value backed by quality and high-quality mid-caps. What about the brokerage's top picks for 2020? SBI, ICICI Bank, HDFC Bank, DCB Bank, Bharti Airtel, L&T, Aarti Industries, Escorts, Ashok Leyland and JK Cement made it to the list.

Reliance Securities also collated the big risks for the markets in 2020. The list includes:

Government Policies

Reliance Securities said the governments’ actions will continue to be key triggers for the market in the short term, while progress on the US-China trade deal and US elections will also have a major impact on the global markets.

"From a domestic standpoint of view, the government’s actions to generate demand and foster the investment climate will be critical for economic recovery. The budget will be important, but we believe that it is not necessary for the government to make all the announcements during the budget," it said.

The government may make appropriate announcements later as there will be better visibility on the management of fiscal deficit, it said.

Valuations

Another major challenge for the year will be valuations. Valuations have continued to rise and India’s market even on CAPE (Cyclically Adjusted Price Earnings) basis is above its long-term mean which has long-term return connotations, the brokerage noted.

Reliance Securities advised investors to build a portfolio with a moderate returns perspective. Owning a portfolio at a slight discount to the market backed by quality will yield better results, it added.

Market Volatility

According to the brokerage, low volatility could continue. It advised investors to expand the portfolio. India VIX currently at 10.5 has reached very low levels with the market consistently trending in the upward direction.

The possible reasons to stoke volatility will be FII selling and a significant increase in interest rates because the government’s borrowing program and inflationary pressures could be underestimated by the market, it said. However, the current bond market yields are still not seeing meaningful pressures, Reliance Securities noted.

Hence, VIX is likely to trend at moderate levels which will provide investors opportunities for portfolio expansion beyond the top 100 stocks. The new year could also see midcaps delivering decent returns.

Given the above risks, the following are the key stock themes for the year ahead, according to Reliance Securities.

Nifty likely to touch 13,900 by December 2020: The brokerage expects the first half of 2020 in the run-up to the budget and progress on trade talks to keep the markets in upbeat mode, resulting in some front-loading of returns.

Post budget, the markets could take a breather if there are no major announcements to stoke demand, it added. While the market setup seems extremely bullish at the current juncture, the brokerage said it would focus on moderate returns as there are a lot of factors dependent on the government’s actions which can easily get delayed.

Banks will be key earnings driver: Banks will see solid earnings growth in 2020 with the big ones such as SBI, Axis and ICICI Bank likely to post strong earnings rebound and growth, according to Reliance Securities. It said banks also fit its themes of value and quality and added them to its top picks in this space.

Quality midcaps could see a return: Reliance Securities said quality midcaps will see more investment as value will be the focus in large caps.

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