Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
The perception that there is a disconnect between behavior of equity market and economic fundamentals is widespread and understandable. However, we should keep in mind that behavior of equities is strongly influenced by expectations of changes. In this, often, change of direction proves more important than quantum of change.
The positivity in the market is driven by a series of positive developments in recent times such as (1) bottoming out of economic growth in India, (2) better than expected corporate performance, (3) improvement in global risk appetite leading to strong FPI flows and (4) announcements pertaining to effective vaccines indicating the beginning of an end to the healthcare crisis.
Your outlook for 2021
We expect equity markets to do well over the medium term. This performance will be driven by acceleration in economic activity and improvement in corporate earnings growth trajectory from single digit over past several years to double digit going forward. Several structural reforms initiated by the government over the last few years will likely make growth more sustainable. Benign global and domestic monetary policy will remain growth supportive over medium term. Weakening of dollar index will be supportive of foreign inflows into emerging markets including India, signs of which are already evident. It is, however, important to remember that volatility and corrections will remain part of the game.
Sectors to watch out for in 2021
We are witnessing acceleration of economic activity. Also, there is a growing realization that operating environment is much better than what was feared earlier in the crisis. This backdrop is positive for economically leveraged sectors. We expect sectors such as banking and financial services and industrials to outperform. On a relative basis, traditional safe sectors such as consumer staples and domestic pharma might underperform.
Which category of funds should MFDs recommend at this juncture?
As mentioned earlier, domestic equity funds are likely to do well over the medium term. As we expect broader markets to outperform (in contrast to narrow large cap driven rally seen in 2018 and 2019), flexicap or large & midcap funds should be chosen over large cap funds. It's important to take into account size of the fund to make sure that it is not so large as to make shifting across market caps difficult. Investors with higher risk appetite may also want to consider midcap and small cap funds where the medium to long term returns could potentially be higher. While selecting funds in these categories, it is important to research if these funds stick to the mandate so as to offer full exposure to these segments. In addition, research on underlying liquidity in these funds is crucial to protect investor interest.
