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Equities to maintain buoyancy in 2021, valuations to remain at top level in medium term: Vinod Nair

No eventful data and announcements are expected in the coming 2 weeks, so stay focused on quality sectors & counters.

December 27, 2020 / 10:51 AM IST

At the start of the week, a new wave attack led by a mutated coronavirus in the UK triggered fear in the mind of investors, and led to a deep correction on December 21. Report of this 70 percent rapid transmitting strain, imposed travel & trade restrictions by several countries to and from the UK.

This fear of another lockdown impacted the recovery rate of the economy. Further, European market witnessed selling pressure due to failure of UK & EU to reach a trade deal on the pre-decided deadline, disturbing the financial markets. Share prices tumbled, oil prices fell and Sterling lost against the Euro and US dollar. The market is vulnerable, it is not possible to handle any bad news since it is constantly trading at supreme level, and rallying in anticipation of positive developments.

The volatility noticed on December 21 started to vanish from the next day onwards as concerns over the new strain of virus reduced. A view by WHO observing that similar variants of bug is noticed in other countries, too, and has no evidence to declare the virus very different or dangerous than original. And that it is not going to impact the inoculation process.

Subsequently, the second fiscal stimulus was announced in the US and British officials indicated that a post Brexit trade agreement with the European Union is inching closer, which was nailed by the end of the week.

The market continued its rally even amidst concerns over new virus strain, strict lockdown and weak global cues. The additional stimulus announced in the US helped for a bounce in the Europe and Emerging Markets, but could not add momentum in the US market, which ended flat with a negative bias on a week-on-week basis. It is said that the quantum of the benefit is well factored-in and below the amount of benefit warranted by the economy.

Close

The rally is continued with strong inflow of funds. The key question is - whether this rally can continue?

On a long-term basis, we should note that the outlook of the economy is getting better. The world GDP growth is expected to rebound strongly in 2021, for India GDP is expected to grow almost as high as 10 percent. Led by a proactive fiscal and monetary gains, market has reverted well above the pre-COVID level due to month-on-month upside in the economy, increase in liquidity and fall in financial risk.

Economy and corporate profit has been growing on a QoQ basis, which is expected to continue for the next 4 to 6 quarters leading to healthy earnings growth. This combination effect of high amount of funds and real earnings growth is expected to continue in 2021 and keep the market buoyant. As a result, the market is likely to stay delighted and maintain its optimism.

At the same time, we should also note that the historical rationales and range of valuation may not provide a reasonable assessment of the market's resilience and momentum during such time. As a result, valuations will remain at top high level, till normalcy comes back, which could take another 6 to 9 months.

In the short-term, we should understand that this rally was upgraded by FII inflows, especially in the last 3 months. FII inflow was boosted post the positive US election result. New investments were placed on-hold ahead the event risk. This positive outcome triggered optimism in the global equity market, in anticipation of ease in world trade policy.

India received a decent size of the benefit of the risk-on strategy, having developed an edge against other EMs due to reforms undertaken before and after the COVID-19. Tax reforms, containment of COVID, new measures announced (like PLI, NPA measures, guarantee to MSME) and strong pharma capability helped to overwhelm other EMs.

Indian rupee is leaping against the USD, as a stable currency compared to other Asian peers, in the last 8 months. So, it is very important for the investors to watch at the trend of the FIIs inflow going forward, which is the main factor of the recent rally. No eventful data and announcements are expected in the coming 2 weeks, so stay focused on quality sectors & counters.

The level of market sentiment is high factoring major part of the gains expected in the near future. The trend of Indian equity is vulnerable to FIIs inflows, in the short-term, if the inflow slows down or turn negative due to any global factors. This can have a double whammy effect in the domestic market because domestic investors have been on negative flow in the last 3 months, which is likely to stay due to redemption pressure led by profit booking.

Equities will maintain its buoyancy in 2021 due to dual effect of liquidity and earnings growth. The optimistic market sentiment, high prices and valuation is at historical highs level, which will stay put in the medium-term. But on a short-term basis, a consolidation will be good and warranted to address the over optimism seen in the last 2-3 months, driven by liquidity.

Even though if a correction is likely, and if it happens in the near future, it will not be a deep one, since the undercurrent is still solid. Further re-opening of the economy, lag effect of reforms & stimulus announced till date, and more stimulus and inoculation will thrive the market. This in anticipated correction, should be used as an opportunity to add more exposure in the equity.

We do not expect more than 7 to 10 percent correction in the main indices. Buying at dips can be considered as a good strategy, in a falling market. Best sectors to invest will be IT, Pharma, Chemicals and FMCG. IT is expected to benefit from drive of digitalization. Pharma due to healthcare requirement of the world and rising stand of India's capability. Similarly, rising demand for chemical has improved the long-term outlook of Indian chemical industry.

All these factors provide an edge to these three industries, with further re-rating, leaders in the respective industry and products will benefit the most. FMCG has a stable outlook in spite economic uncertainties, they are safe and positive to invest, though they may underperform in the short-term.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Vinod Nair is a Head of Research at Geojit Financial Services.
first published: Dec 27, 2020 10:49 am

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