Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
There is a synchronous rally in equities across the world, led by excess liquidity; this is more pronounced in emerging markets. India has been a beneficiary of this trend as can be seen from highest ever FII inflows in recent weeks. In addition, there is definite comfort on covid-19 virus front as
a) Better protocols for treating the virus, which is resulting in very low mortality rate
b) Visibility on vaccine
On one hand, we are witnessing steady improvement in economic parameters as the lockdown is lifted and economic activity picks-up. One can expect strong recovery in GDP growth and corporate earnings in FY22 over FY21 due to low base. This along with strong flows from FIIs and low interest rates are making equities an attractive class. So, right now everything is in favour of equity markets – earnings growth, improving economy and strong liquidity.
Your outlook for 2021
We are cautiously optimistic on the outlook for 2021. While everything seems to be going well for equity markets right now as reflected in current stock prices, this may not be a great time to invest more into equities or being fully invested in equities only. Diversification and asset allocation are very important to build wealth. We remain convinced on equities as the best asset class to generate superior returns, especially in low interest rate regime. However, there are challenges in the economy and in few areas of the stock market as highlighted by massive over subscription to IPOs.
Sectors to watch out for in 2021
We believe many sectors are at an interesting stage in terms of outlook for 2021. Let’s start with financials, which is the largest sector in all major indices. After underperforming for most part of the year, this sector has bounced back in recent weeks as companies reported strong numbers in 2QFY21 in-terms of profit growth, lower NPAs and collection efficiency. However, one needs to watch how they would perform in 2021, after moratoriums are over.
Outlook for IT and Pharma sectors clearly appears to be positive as they are benefitting from growing digitization and focus on healthcare including export opportunity for Indian companies.
Which category of funds should MFDs recommend at this juncture?
First, distributors should clearly assess the customer’s profile in terms of their risk appetite and asset allocation before recommending any product. Diversified equity funds are the preferred choice for investors with reasonable appetite. Considering the volatile nature of the markets, dynamic asset allocation funds are preferred for investors with lower risk appetite.
