It has been a year of wild swings for equity market investors. But, while we are ending on a high, with markets likely to continue their upward march in 2021 too, investors must temper down their returns expectations in the new year, say analysts.
On December 30, the BSE Sensex closed at 47,746.22, that’s a 16 per cent year-on-year gain and a staggering 86 per cent jump since the low of 25,638.90 it touched on March 24. Similarly, the NSE Nifty50 index closed on Wednesday at 13,982 levels, an 86 per cent surge from its 52-week low of 7,511.10 and 14 per cent from a year ago.
In contrast, French bank BNP Paribas sees Sensex at 50,500 by the end of 2021, which is an upside of 6 per cent from current levels. Investment bank Morgan Stanley too had set a Sensex target of 50,000 for December 2021.
The markets crashed in March as the investors were fearing the worst impact of the pandemic on the global economy through the next few months. But, a huge liquidity injection as governments and central banks unleashed trillions of dollars in stimulus measures have also led to a quick and strong rebound. Investors were also buoyed by signs of a faster than expected revival in the economy, falling COVID-19 cases in India and better-than-expected corporate earnings in the September quarter, say analysts.
“Liquidity is something that has kept the markets upfloat very strongly. The move in the last one-two months has been staggering to say the least,” pointed Mayuresh Joshi, the head of research at William O’Neil and Company India.
Till December 30, foreign institutional investors had pumped in Rs 1.66 trillion in India’s equity market in 2020, compared with the Rs 1.01 trillion they invested here in 2019. The expectations are that these flows would remain strong as stimulus measures worldwide are likely to continue well into 2021 as coronavirus uncertainty still remains and cases continue to surge in the developed world, even as several vaccine candidates have now received approval in many countries. This excess liquidity is expected to continue to make its way into emerging market equities like India.
“The additional bond-buying program of ECB (European Central Bank) and fresh stimulus by BoJ (Bank of Japan) point to a healthy double-digit US dollar FPI flows in 2021. Equities could remain the preferred asset class as US bond yields are below 1 per cent and most bond yields of European nations are in negative territory,” said Jaideep Hansraj MD and CEO of Kotak Securities.
Analysts will also be watchful of corporate earnings. While earnings of Nifty50 index in the current financial year ending March 2021 are seen up 8 per cent, next year they could surge 29 per cent, according to Hansraj of Kotak.
French bank BNP Paribas is also overweight on India on the back of the various reforms measures that the centre has announced and a well-entrenched economic revival.
“Most high-frequency indicators – auto sales, steel and cement consumption and railway freight traffic to name a few – are at or higher than their pre-Covid levels. In some pockets of discretionary consumption, like passenger vehicles, feedback from manufacturers indicates not just inventory restocking but also a genuine uptick in retail demand,” noted Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas.
Even as the market is looking up, some corrections can't be ruled out along the way, say analysts.
“Liquidity flows across emerging markets could remain strong which bodes well for Indian markets. However, intermittent corrections cannot be ruled out as there is a risk of a second wave of COVID19 and thus sustenance of economic recovery holds the key,” according to analysts at Motilal Oswal Financial Services.
Joshi of William O’Neil also expects markets to take some breather in 2021; the reasons could be either geopolitical or economic factors or maybe profit booking, he says. However, there is unlikely to be a huge crash as seen in March this year.
“The markets seem to suggest the recovery from COVID will be a ‘V’ shaped one with significant upside earnings revisions in earnings forecasts. Our view is that while the economy is bouncing back sharply from the impact of COVID, the stock market may have run ahead of fundamentals,” said Harshad Chetanwala, co-founder of MyWealthGrowth.com.
What sectors are analysts betting on in 2021?
Joshi expects IT companies should continue to do well, while there will also be a focus on infrastructure companies, given the government’s huge infra push.
The focus on infrastructure projects, could, in turn, drive construction and capital goods companies and renewable energy companies among others.
Motilal Oswal is also positive on IT, banking and financial services, healthcare, telecom, automobiles and consumer goods makers.
“Cyclical sectors and stocks could score over defensives in 2021. Within defensives, select consumer staples or FMCG companies could also deliver better returns due to the sector’s underperformance in 2020,” said Hansraj.
Investors should focus on select large banks, capital goods, oil and gas, cement, utilities and metals and mining companies, he added.
“Private banks and insurance companies should continue to benefit from market share gains. Consumer stocks benefitting from domestic rural demand and service exporters benefitting from reviving global deal flow shall continue to dominate the investment landscape,” said Raychaudhuri of BNP Paribas.