Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
Market level is a function of corporate earnings certainty and visibility. Visibility has clearly improved with covid vaccines in place. A few other factors that have clearly improved visibility on financial year 2021 and 2022 corporate earnings:
- Covid situation in India is one of the best with recovery rate at >95% and new active cases are declining sequentially for past few weeks
- This has enabled the economy to keep opening up without any intermittent lockdowns post June
- Corporate earnings have surprised positively in the second quarter with Nifty witnessing earnings upgrades of 6-8% for 2021
- Banking system delivered slippages and restructuring much below consensus, meaning faster credit cycle revival possibility
- Global fiscal/monetary situation and in-turn domestic liquidity environment being extremely benign for corporates and banking system
While the macroeconomic and corporate earnings visibility has improved meaningfully over the last 3 months, emergence of second wave and limited domestic fiscal push are major risks for the markets.
Your outlook for 2021
Macro growth visibility has improved with positive outcomes on vaccines. We expect the corporate earnings visibility to keep improving given the base effect and operating leverage that will play out with revenue growth returning in financial year 2022. However, with market valuation at 22x, near term returns can remain capped and market will move to stock and sector specific action rather than broad-based rally that we have witnessed in past 3 month. Expect normalized returns (Inflation +500-700bps) over next 12-24months
Sectors to watch out for in 2021
We think financials, discretionary and other economy opening up can be sectors to watch out for in the days to come.
Which category of funds should MFDs recommend at this juncture?
We think that fund recommendation should be a function of investor profile rather than trying to time the market. We prefer a staggered exposure to multi-cap, large and mid-cap fund and small cap category.
