2020 was the year when age-old asset allocation principles shone. If you followed the rational plan of keeping equity allocation intact, adding to it when it fell in March, diversifying across market caps, held some assets in gold, some in debt (and maybe even some in cryptocurrency), no year would have rewarded your discipline as 2020 did.
Having said that, markets are at historic highs and the tide of liquidity has floated all boats. Given the bull run since March, there is enough luck disguised as skill in the markets and we must be objective when we evaluate our performance and portfolios.
As we enter 2021, it is most important to remember that some things do not change – uncertainty, the need for rationality in asset allocation, and forecasts being precisely wrong.
These 6 factors will impact market movement in 2021:
Corporate earnings need to play catch up: While small and mid-caps have some room, Nifty PE multiples are already stretching into expensive territory. This year there has been sufficient belt-tightening by companies that have kept costs low resulting in better-than-expected earnings. The big question next year will be, can they grow earnings based on demand? Especially, for smaller firms with high operating and financial leverage, this would be a powerful engine for earnings growth.
Vaccine rollout: The biggest driver of real-world demand will be the efficacies of vaccine roll out by India as well as other countries. Further, the government's response to a second wave will also be critical. While there is sufficient hope, markets are pretty skittish about any negative news on this front; the steep correction in December on news of the new strain points to this. 2020 was the year of scientific breakthroughs and 2021 must be one of innovative supply chain efficiencies.
Inflation: As the world opens up again, there may be spikes in inflation in the US and EU, rise in yields, and tightening of liquidity. For India, the government has not matched the ratio of liquidity to GDP of other countries. This may be for the best as even with our modest relief packages, we saw CPI peaking at 7.6 percent in October.
While the RBI has indicated that inflation is likely to moderate in the next quarter, it has revised the target upward for upcoming quarters. Therefore, any rate cuts are unlikely. Further, if assumptions of inflation do not hold, there is a risk of hikes and therefore a domestic liquidity squeeze.
Economic recovery: An overarching number that encapsulates all of the above is how we, as a country, recover next year. The list of reforms that the government must make is long and necessary. However, most of those take years to reflect actual numbers. In the short-term, markets will track and react to the Budget, GDP growth, PMI, inflation and demand recovery.
Liquidity and volatility: Given that the flood of liquidity made emerging markets so popular with FIIs, any change or even threat of change to this may add volatility to our markets. Are the markets becoming addicts of this seemingly endless supply of money? Will even the hint of slowing down money flow lead to corrections? We saw this in the Taper Tantrum of 2013 as the Fed slowed down its quantitative easing programme, so it is not an unreasonable stretch of the imagination.
Global cues: We are far more linked today to global cues than five years ago and with every year we will be increasingly more correlated. Therefore, the US stimulus package, EU’s bond-buying program, Brexit negotiations, US-China relations, USD depreciation, all impact the markets directly.
Therefore, as we leave behind 2020, the real world is slightly bruised but has more perspective and wisdom. As you decide how to invest in 2021, irrespective of whether the market goes up, down or sideways, keep in mind the age-old wisdom that holds true every year:- In the long run, markets trend up, not down;
- If you buy good stocks at the right price, market levels are irrelevant.
Happy New Year to all the readers of Moneycontrol. May you find your Upside in 2021!
(Kanika Agarrwal is the Co-founder and Chief Investment Officer at Upside AI.)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.