Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
The markets have rallied substantially in the second half of 2020 after the correction on the back of pandemic outbreak in late first and second quarters. This recent rally is led by liquidity driven global inflows, increased direct retail participation in equity markets and news flows around the gradual opening up of the economy. We believe that as the economy opens, there could be more businesses back on track. Also, as there could be positive news flow on the control and immunization of COVID, the markets can be supported.
Your outlook for 2021
With the threat of the global pandemic receding, in all likelihood, the world is expected to come back to some semblance of normalcy by mid-2021. The vaccination drive has already started in most developed economies and it is only a matter of time before a majority of the population gets vaccinated, giving more legs to the recovery.
For India, the gradual shift of supply chain from China is expected to lend significant support to domestic manufacturing particularly in sectors such as autos, chemicals (including agri and pharma) and electronics where India has developed significant core competencies over the years.
The Production-Linked Incentive (PLI) scheme is expected to attract significant investment from both foreign and domestic, thereby improving investment demand. Over the past decade, we have seen the economy going through several shocks including the global financial crisis, demonetisation, implementation of GST and the banking sector restructuring which impacted investment demand significantly. The economy was largely driven by consumption and agriculture. Now, with the various initiatives of the government, manufacturing as a theme is expected to see a revival. This is likely to result in pick up in infrastructure activities, real estate demand and consequently job creation.
So overall 2021 looks quite promising for equities as an asset class, notwithstanding the bouts of volatility that market may experience especially after a sharp run up. However, long term investors should take advantage of this volatility as corrections are likely to be sharp and swift and increase exposure to equities based on their risk profile.
Sectors to watch out for in 2021
In the recent past, within the financial services sector, several banks have had collection efficiencies between 95-97% (close to pre-covid levels) which is expected to benefit this sector in 2021. Furthermore, numerous banks have also suggested that corporate restructuring would be significantly slower than anticipated. On the other hand, stress in the SME segment has been significantly addressed by the credit guarantee scheme, and thus, we expect overall restructuring in low-single digits. Overall, we believe banks/ NBFCs with strong liability franchise are expected to continue to gain incremental share and may reflect steady net interest income growth aided by margin expansion.
The specialty chemical business in India has been gaining momentum over the past few years and many companies have developed significant knowledge and skills surrounding complex chemistry. Further, they have managed to secure long term contracts with global agri and pharma players thus leading to significant investments in creating global scale capacities. On the other hand, the de-risking of supply chains from China is expected to additionally benefit the specialty chemical companies in India.
Cement and cement products are expected to gain on the back of the demand for building materials, which may revive especially owing to the recovery in rural consumption and housing demand.
Which category of funds should MFDs recommend at this juncture?
Equity portfolios can potentially outperform other asset classes like debt over the long term and allocation to equity funds can be considered for long term investments. More conservative investors can invest in the hybrid category of funds like the hybrid equity and balanced advantage funds. Investments in fixed income funds can be considered for better income generation.
Investors should follow the asset allocation based on their investment goals and risk appetite. Ideally, they should consult with their financial advisors to decide on the asset allocation of asset classes and funds. These should be reviewed at a mutually agreed frequency. We believe investors should continue to invest in equity funds in a systematic manner (through SIPs and STPs).
