The equity market rally that began towards the end of March 2020 continues unabated. Twenty days into 2021, the BSE Sensex is closing in on the record level of 50,000, while the NSE Nifty50 is nearing the 15,000 mark, something that many brokerages had forecast would happen only by the end of this year. On Wednesday, the Sensex zoomed 394 points or 0.8 per cent to close at 49,792.12. The Nifty50 was up 124 points or 0.9 per cent to 14,644.70 level.
A relentless flow of money from foreign institutional investors (FII) is a key reason behind the bull run in the markets. So far in January, FIIs have pumped in more than Rs 20,200 crore in India’s equity markets; this is on top of Rs 1.70 lakh crore they invested in 2020. As the COVID-19 pandemic hit much of the world, central banks and governments poured in billions of dollars in stimulus. With the dollar index remaining weak, the expectation is that the flows are likely to continue for some time.
Corporate earnings are also cheering investors. The July-September quarter was the first time that we actually saw earnings expectations being upgraded after several quarters, and the December quarter earnings announced so far by several large companies, including software exporters and banks, point to another strong quarter.
With several COVID-19 vaccines getting approval and a few others in various levels of testing, investors are also expecting an endgame for the pandemic, which is also adding to the positive sentiments.
“There will be further gains for equity markets in 2021. Asian equity returns of 10-15 per cent are possible,” Roopali Prabhu, chief investment officer at Sanctum Wealth Management said in an interaction on Wednesday.
Sanctum is expecting a strong corporate earnings growth of 37 per cent in the year ending March 2022, and 20 per cent in the year later.
Even as Sanctum expects equities to remain buoyant in 2021, valuations are a concern, following a 94 per cent rally since the low hit on March 24, 2020.
“Valuations are expensive relative to history. Nifty is trading at 21 times FY22 (earnings expectations). It is not a market where everything is comfortable,” said Prabhu.
All eyes will now be on the Union Budget that Nirmala Sitharaman will present on February 1. It is expected that the finance minister will announce huge spending across sectors, in a bid to charge up the economy. But, resources are clearly limited. A lackluster budget could trigger some correction in stocks.
Most major central banks are expected to continue their loose monetary policy and keep interest rates low in a bid to help economies on a rebound. So, the equity rally may have some more steam left as the loose monetary policy will continue to support flows into risk assets like stocks, in turn driving valuations.
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“The G10 central bank balance-sheet now is crossing $ 25 trillion. This record money printing by central banks around the world should keep up the liquidity. The central banks have also cut interest rates rapidly. We believe that high liquidity and low interest rates will support equity valuations,” Kotak Mutual Fund, which managed Rs 2.16 lakh crore in assets under management at the end of December, said in a recent note.
The market rally, which was until recently dominated by select large cap stocks is also now becoming broad-based; so a diversified investment strategy could help.
“Small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline,” said analysts at Axis Securities.
Housing sector, which has seen consolidation kicking in in recent years, and more so as smaller developers struggled due to COVID-19, and manufacturing, which is expected to get a boost as multi-national companies look to shift their supply chains from China, are among the themes Sanctum is betting on.
It also expects low interest rates and cost controls to aid corporate profitability. Recent government initiatives like the production-linked incentives is expected to help industrial companies. Also, a revival in capital expenditure and infrastructure spending should give cement, building materials and metal companies a boost.
Axis Securities is also “overweight” on pharma, specialty chemicals, telecom, information technology, consumer staples and the automobile sector.