The year 2021 is expected to be a better one for markets with likely strong recovery in both economy and earnings compared to a covid-hit 2020, according to analysts. However, this year’s heady gains in equities could possibly mean a lot less room for further appreciation in 2021.
Markets hit an all-time high on the last day of a volatile 2020, which had a divergent trend of a sharp fall and unexpected rebounds. The Nifty briefly touched the 14,000 mark for the first time ever on Thursday before closing almost unchanged at 13,981.75. The BSE Sensex ended at 47,751.33, up 5.11 points or 0.01%.
Markets have not only recovered from the more than 20% slump in March but also hit record highs multiple times in 2020. Both the BSE Sensex and Nifty gained 15-16% in rupee terms in the year.
This is the best yearly performance of the Indian markets since 2017 when benchmarks surged 28%. In dollar terms, both the indices increased 12-13% compared to the 22.51% jump of Japan’s Nikkei, 38.95% gain of South Korea’s Kospi, the 21.38% rise of China’s Shanghai Composite. However, Hong Kong’s Hang Seng was down 2.94%. Other global markets such as Nasdaq soared 43.44%, while Dow Jones jumped 6.56%.
“The year 2020 seems to be ending with expectations of a full economic rebound on hopes of a vaccine availability in second half of 2021. A combination of vaccine-driven growth recovery, moderate inflation, continued fiscal and monetary stimulus and dollar depreciation portends a goldilocks scenario for Asian equities,” said Manishi Raychaudhuri, head of Asia Pacific equity research, BNP Paribas. Maintaining an overweight stance on India, BNP Paribas sees the Sensex hitting 50,500 by 2021.
Factors that will be critical for markets in 2021 are how the economy emerges out of the slowdown, earnings recovery, vaccine progress, rupee and oil volatility, the stance of global central banks on liquidity and US President-elect Joe Biden’s policy changes, according to analysts.
Kotak Institutional Equities expects overall market return may be similar to 2020 and more uniform across sectors compared to the wide divergence seen in 2020.
“We expect most of the returns in FY2021/2022 to come from roll-forward of earnings in the case of most stocks or moderate earnings upgrades in a few rather than from any large changes to multiples,” it said in a note on 17 December.
Abundant global liquidity chased equities across countries with emerging markets being the key beneficiary this year. To combat economic slowdown, global central banks of countries including the US, the UK, France, Germany, Italy, Canada and Japan adapted a loose monetary policy stance.
India received around $22.53 billion foreign institutional investors (FII) money to equities in 2020, the highest since 2012 when FIIs were net buyers of $24.55 billion. Last year, FIIs were net buyers of Indian shares worth $14.23 billion.
Domestic institutional investors (DIIs) were, however, net sellers of ₹37,028.31 crore in 2020, the first net selling by them since 2014.
However, Saion Mukherjee, head of India equity research, Nomura, struck a cautious note. “The impact of the pandemic on consumers is large and credit growth and spreads are far from indicating a sanguine outlook. High-frequency data indicating a revival is driven by pent-up demand and inventory stocks that are likely to subside over time. Consensus earnings growth expectations are high and market valuations are at the peak. Therefore, we are cautious and selective on Indian equities,” he said.
