Sensex may hit 50,500 in 2021 but the ride can be bumpy, says BNP Paribas

With the economic recovery picking pace and the availability of a COVID-19 vaccine, global brokerage firm BNP Paribas expects the Indian equity benchmark Sensex to hit 50,500 in the year 2021.

The brokerage firm is overweight on India and said it continues to focus on quality and market leaders.

"Private banks and insurance companies should continue to benefit from market share gains. Consumer stocks benefitting from domestic rural demand and service exporters benefitting from reviving global deal flow shall continue to dominate the investment landscape," BNP Paribas said.

The brokerage believes the availability of vaccine should push up consumption and investment globally.

"BNP Paribas economics team points out a reduced need for lockdowns and behavioral change in less vulnerable cohorts as the key drivers of the consumption upturn. Besides, positive sentiment in the backdrop of accommodative monetary and fiscal conditions could also incentivise corporates to invest or to start rebuilding inventories," the brokerage said.

Assuming a wide availability of COVID vaccines by the second half of the year 2021, BNP Paribas expects a sharp recovery.

"A combination of growth revival, moderate inflation, continued fiscal and monetary accommodation and USD depreciation portends a goldilocks scenario for emerging market (EM) equities–particularly Asian equities," the brokerage firm said in a note.

It highlighted that "if COVID vaccines’ efficacy and distribution belie markets’ optimism, inflationary expectations (measured by the US 10-year breakeven) could drop–unravelling the value trade in equities".

The brokerage firm said there are hurdles that could halt or reverse the current switch from growth into value, while some others could "stymie the Asian equities investment thesis altogether".

A less-effective COVID-19 vaccine or if administering of the shot gets delayed beyond the broadly expected timeline, it could dampen the rally in equities, the brokerage said.

Besides, if improvements in economic conditions lead policymakers to phase out stimuli prematurely, it would belie economists’ expectations of a gradual pick-up in inflation, BNP Paribas said.

"A moderation in inflation expectations could also arise from a persistent risk-averse consumer behaviour (higher savings, less consumption) or from a potential fiscal gridlock in the US Congress that could delay or diminish fiscal rescue plans for the economy," BNP Paribas said.

"In a scenario where the inflation breakevens decline–our tilt towards value stocks could be at risk," it said.

In case US real yields increase and the difference between US and emerging markets real yields diverges and the divergence sustains for a longer time, BNP Paribas said its hypothesis of USD depreciation may unravel. "Underestimating the inflationary impact in the US could therefore be the second risk," it said.

Geopolitical risks also remain a factor. "Idiosyncratic geopolitical risks, like acceleration in US-China tensions or Brexit risk, could diminish risk appetite significantly and hurt EM equities," BNP Paribas said.

Domestic policies and valuations are the other two risks that the brokerage firm flagged.

Asian equities are valued steeply, though EPS estimates are rising and VIX is not at complacency levels, BNP Paribas said.

"We believe most Asian markets would trade close to their current 1-year forward P/BV, except onshore China and Thailand, where we estimate a small rerating, and India, where we expect a slight derating," said the brokerage.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.