The year 2021 is expected to be a better year for markets with likely strong recovery in both economy and earnings compared to a covid-impacted 2020, according to analysts. However, this year’s heady gains in equities could possibly mean a lot less room for further appreciation in 2021.
Markets hits an all-time high on the last day of a volatile 2020 which had a divergent trend of a sharp fall and unexpected rebounds. The Nifty briefly touched 14000-mark for the first time ever on Thursday before closing almost unchanged at 13,981.75. The BSE Sensex ended at 47,751.33, up 5.11 points or 0.01%.
Markets have not only recovered from the more than 20% slump in March but also hit record highs multiple times in 2020. Both the BSE Sensex and Nifty gained 15-16% in rupee terms in the year. This is Indian markets best yearly performance since 2017 when benchmarks surged 28%. In dollar terms, both the indices increased 12-13% compared to 22.51% jump of Japan’s Nikkei, 38.95% gain of South Korea’s Kospi, 21.38% rise of China’s Shanghai Composite while Hong Kong’s Heng Seng was down 2.94% in 2020 in Asian region. Other global markets such as Nasdaq soared 43.44% and Dow Jones jumped 6.56%.
“2020 seems to be ending with expectations of a full economic rebound on hopes of a vaccine availability in 2H21. A combination of vaccine-driven growth recovery, moderate inflation, continued fiscal and monetary stimulus, and USD depreciation portends a goldilocks scenario for Asian equities,” Manishi Raychaudhuri, Head of Asia Pacific equity research, BNP Paribas said. Maintaining an overweight stance on India, BNP Paribas sees the Sensex to hit 50,500 by 2021.
According to analysts key factors that will be critical for markets in 2021 are how economy emerges out of the slowdown, earnings recovery, vaccine progress, rupee and oil volatility, global central banks stance on liquidity and US President elect Joe Biden’s policy changes.
“2021 will be better but ‘beta’ year”, said Kotak Institutional Equities. It expects overall market return may be similar to 2020 and more uniform across sectors compared to the wide divergence seen in this year. “We expect most of the returns in 2021/FY2022 to come from roll-forward of earnings in the case of most stocks or moderate earnings upgrades in a few rather than from any large changes to multiples,” it said in a note on 17 December.
Abundant global liquidity chased equities across countries with emerging markets being the key beneficiary in this year. As a reaction to combat economic slowdown, global central banks of countries including US, UK, France, Germany, Italy, Canada, and Japan adapted a loose monetary policy stance. India received around $22.53 billion foreign institutional investors (FII) money into equities in 2020, highest since 2017 when FIIs were net buyers of $22.86 billion. Last year, FIIs were net buyers of Indian shares worth $3.49 billion. Domestic institutional investors (DIIs) were, however, net sellers of ₹37028.31 crore in 2020, first net selling by them since 2014.
According to Saion Mukherjee, head of India equity research, Nomura, liquidity is lending a strong helping hand to the equity markets. However, he adds that liquidity can also have a positive impact on fundamentals, if supported by adequate policy measures and improved sentiment while the markets seem hopeful, he is yet convinced of this impact.
“We think the impact of the pandemic on consumers is large, and credit growth and spreads are far from indicating a sanguine outlook. High-frequency data indicating a revival is driven by pent-up demand and inventory stocks that are likely to subside over time. Consensus earnings growth expectations are high and market valuations are at the peak. Therefore, we are cautious and selective on Indian equities,” Mukherjee said.
As Indian markets are perceived to be in bull market, analysts feel steep valuations of markets could be risky.
“Indian equities have entered a bull market environment as evidenced by the one year rolled forward price to earnings (PE) at 22 times rising beyond the peak of FY08 at 20 times,” said analysts at ICICI Securities.
They feel that bull market environment prevailing in CY21 could take Nifty to 14,900 levels. “However, if market bullishness reverts to average sentiment, the base case fundamental value is 13,500, which indicates flat returns for 2021. If a risk-off environment materialises, we expect Nifty to touch 11,600 on the downside,” they said.