Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
Market movements are a function of fundamentals, valuations and liquidity. In 2020, global markets moved from optimism to despair to hope and back to optimism. The covid spread and lockdown affected the economy and markets as liquidity vanished globally. The global markets stabilised as almost every country went for the policy stimulus (fiscal as well as monetary). And now in December 2020, optimism is back as the vaccine to has been launched by quite a few pharma companies. The strong monetary policy support by way of money supply created a space for valuation premiums to expand leading to almost all global markets breaching pre-covid highs.
Indian markets too participated in the rally like their global peers. As the year progressed, the expectations of a sharp economic downturn gave way to quick recovery as the consumer resilience in festive season was supportive of growth. In addition, we had two significant drivers.
- On the policy front, the announcements under Production Linked Incentives and Aatmanirbhar Bharat have benefited India by attracting foreign flows. This has a strong potential for creating a virtuous cycle of capex creating jobs & income growth, which in turn spurs consumption.
- India has been a big beneficiary of flows, partly due to economic growth potential as well as increase in India's weight in MSCI Emerging Market. This not only creates fresh allocation from passive ETFs but also from active regional funds as they seek to maintain their core India overweight positions intact.
Your outlook for 2021
The year 2021 continues to remain challenging like every year. As usual, we have positives and concerns.
Key positives are the expectation of vaccine efficacy leading to a normal world, pace of recovery in Indian as well as global economy especially on services front, visibility of investment and capex cycle in India and a very weak base in the 2-3 quarters of calendar year 20 to support growth in calendar year21. Another positive could be some more increase in India's weight in global benchmarks (equity as well as bonds) as the index providers are forced to recognise India's economic size as well as growth potential going ahead.
The primary concern areas are any unexpected issues with vaccine efficacy, asset quality concerns in Indian banks as we are yet to see the clear picture about the past 3 quarters. Another concern, which is to be watched carefully is how central banks of different countries deal with inflation and liquidity.
This can be a big event in 2021 as the liquidity has been supportive for markets in 2020.
Sectors to watch out for in 2021
The year 2020, especially post covid, has seen a swift and start rotation amongst sectors. We believe the year 2021 could also see as similar trend where market leadership could keep changing hands in quick succession. We believe stock selection could emerge as a bigger contributor to returns.
Which category of funds should MFDs recommend at this juncture
MFDs should continue to focus on asset allocation as a primary tool. Decision to invest in equities should not be driven by low yields on fixed income. The investor's risk appetite as well as time frame is a very crucial factor in deciding asset allocation. So we would advise MFD to recommend hybrid equity funds (conservative as well as aggressive equity allocation).
From a pure equity fund perspective, large & mid cap, multi caps as well as mid caps can be recommended by MFDs.
