Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
All the returns in 2020 have come from valuations rerating, while earnings didn't contribute. In response to covid crisis, the aggressive response from global policymakers particularly the US Fed and other major central banks helped risk assets to go up higher everywhere in the world. Record low real yields and central banks' commitment to keep financial conditions super loose have led to sharp rally across markets. India has been amongst the biggest beneficiaries of foreign flows as the new high are being made on solid FPI flows.
Other factors like Biden victory, early breakthrough in vaccine and strong economic recovery in the last few months have all contributed to strong equity gains. Also, the expectation of very strong cyclical recovery in 2021 has led to market scaling fresh highs.
Your outlook for 2021
We expect sharp rebound in 2021 GDP led by manufacturing and infrastructure sector. Corporate profits have been better than economic growth rebound. We expect this to continue in 2021 on improved operating leverage and strong pricing power across sectors. We expect cost of capital to remain low and liquidity to remain benign for markets. Despite elevated valuations, we expect equities to deliver strong returns in 2021 although there will be occasional volatility and returns will not be linear.
Sectors to watch out for in 2021
We expect midcaps to outperform large caps in 2021 on improved breadth of economic activity. Since Indian economy will likely deliver strongest growth among peers the recovery in domestic demand bodes well for broader market versus large caps. Sectors like materials, financials including insurance, infrastructure including utilities and technology may be the sectors to watch out for in 2021.
Which category of funds should MFDs recommend at this juncture
Midcap or mutli cap funds should be preferred for next 12 to 24 months. However, given the elevated valuations and recognizing challenges to our own forecasting ability, I would suggest some sizeable allocation in asset allocation funds like balanced advantage fund and/or multi asset fund. Diversification is must when it comes to portfolio allocation.
