The year 2020 has been challenging and the stock market has fared decently amid the pandemic. After testing multi-year low levels in March, the benchmark indices Sensex and the Nifty witnessed a sharp recovery and turned positive for the year.
The recovery is largely led by robust foreign capital inflows amid excess liquidity low-interest rate scenario, improved corporate earnings in the second half of CY20, fiscal stimulus, vaccine hopes, among others.
However, as we enter 2021, uncertainty still prevails and analysts are of the view that markets may see a correction going ahead which can be used as a buying opportunity.
Here are the factors that will impact the markets in 2021:
COVID-19 new strain cases
: The new strain of COVID-19 detected in the UK is being seen as a major concern going ahead. India has already reported 25 people with this more dangerous infection. Market participants are of the view that it would be important to control its spread to restrict another blow to the market. India’s total COVID-19 case tally has crossed 1 crore.
Vaccine rollout: There are some positive developments over the coronavirus vaccines and the market rallied on this in the fag-end of the year. However, there are challenges with respect to the distribution, logistics and pricing of the vaccine. The response from the government on the vaccination drive will also be eyed by the market participants.
Corporate earnings: The corporate earnings for the third quarter of FY21 are expected to be better with the companies continuing to benefit from low cost and high margins.
"The IT and pharma stocks will continue to perform well. There will good traction in infrastructure, capital goods, engineering and power companies amid the government’s focus on infrastructure. Companies in digital space will benefit going ahead," said Avinash Gorakshakar, director – research, Profitmart Securities.
Economic growth: With the business opening up, the economy is showing signs of recovery. The major economic indicators such as PMI, inflation, union budget will be crucial for the market trajectory going ahead. Analysts believe markets may see a pre-budget rally, but there remains uncertainty about the budget and how government will manage its finances and keep the growth rolling on.
Earlier than expected rebound in economic momentum is also likely to boost government tax receipts. Analysts expect the 2Q fiscal headwind to turn into a tailwind, pushing GDP estimates further.
Liquidity: The domestic markets have been flooded with excess liquidity as the FIIs pumped record money into emerging markets, especially India. Any change in FII flows will impact the domestic markets. Policy changes in the developed countries, concerns over global economic growth may hurt the FII inflows in India which may lead to correction in the markets.
Inflation: Rising inflation poses a key risk for the market. Although, the stimulus provided by the government may help in solving today’s economic issues, it can bring back inflation which was missing for most of the part of last decade. Inflation can also rise due to deglobalisation.
Analysts are of the view that the returns in CY21 could be more broad-based and see the markets behaving differently in the first half and second half of CY21.
"We can expect the Nifty to go anywhere between 14,000 & 15,000 range sometime in first quarter of CY21. Post budget and Q4 result season, we expect markets to go into some kind of consolidation phase and witness time correction," said Jaideep Hansraj, MD & CEO, Kotak Securities.
He also expects moderation in monetary policies and rising yields scenario in 2HCY21, which will lead to mean reversion of valuations towards 10/15 year averages.
"Based on this thesis, we have used the previous 15 years peak of 19x Fw PE multiple to value the Nifty-50 to derive at our CY21 end target. We expect Nifty-50 to end CY21 somewhere around 13,500 and BSE Sensex to end at around 46,000," Hansraj said.
(Edited by : Jomy)