Quality Stocks Hold Key

EXPECT A ‘RALLY IN STOCKS’, NOT A ‘RALLY IN THE MARKETS’; IT, PHARMA COULD BE THE BEST BET

With 2021 just around the corner, here’s a glimpse of what to expect in the new year — in stocks, insurance or gold. Read on what lies ahead also in mutual funds, debt instruments, real estate and borrowing in the following pages.

Taking Stock: The Year That Was

The year 2020 could well go down in history as one of the most testing years for the market. Indices were on a rollercoaster ride The Sensex fell 38 per cent from its peak of 41,952.63 on January 14 to a low of 25,981.24 on March 23.

“The market has seen astonishing recovery since the lows hit in March 2020. Unlike previous crashes, which were caused by structural failures, this one was due to something that was unforeseen. Once we as an economy normalised the effects of the pandemic, businesses started functioning at levels observed in the initial days of 2020,” says Nikhil

Kamath, Co-Founder and Chief Investment Officer (CIO), True Beacon and Zerodha.

“Though technically the economy is in a recession, high-frequency macro indicators have signalled a faster-than-expected recovery. Corporate earnings have surprised for two consecutive quarters supported by management commentary, leading to robust earnings outlook for next two years,” says Rajesh Cheruvu, CIO, Validus Wealth.

The Road Ahead

Besides domestic factors, global liquidity is also chasing stocks in emerging markets such as India. The country's weightage has increased in the MSCI index, a benchmark for major international fund houses. This is likely to keep liquidity high going ahead. “Excess liquidity driven by ultra-easy monetary and fiscal policy, as a response to the pandemic mayhem, is likely to persist at least for a couple of more years,” says Cheruvu of Validus Wealth.

While the initial rally was driven by select stocks, it is now more broadbased.

“Market breadth that was very narrow two-three quarters ago has now improved to 95 per cent. Even retail participation, which had reached 70 per cent during the lockdown, has now moved down to 60 per cent closer to long-term average of 55 per cent. Rising institutional participation would control speculative behavior, thereby lending long-term confidence to market participants,” adds Cheruvu.

In a nutshell, the market appears set for an average year in 2021. “Despite the fact that stocks are trading at all-time highs, we believe the Nifty can generate returns of 10-12 per cent from the current levels by the end of 2021. We also believe that the broader market will outperform the Nifty in 2021,” says Jyoti Roy, DVP, Equity Strategist, Angel Broking.

However, the possibility of a downside does exist. “We expect some sort of consolidation or correction in the medium term. On the upside, markets can rally to 14,000-14,200 only if supported by economic data over the next few quarters. On the downside, 10,800-11,000 is possible given that markets are trading at a record P/E of 36, which is not sustainable. Even the average P/E of the markets is currently 2122, so it is better to hedge your position or book profits right now,” says Hemant Sood, MD, Findoc Group.

Quality stocks hold the key in 2021. “We expect 2021 to be a year of ‘rally in stocks’ and not ‘rally in the markets’... it would be more of a ‘stock-picker’s’ market,” says Rupen Rajguru, Head, Equity Investment & Strategy, Julius Baer India.

Sectors To Look Out For

“While we expect sectors with strong revenue visibility such as IT and pharma to do well in 2021, cyclical sectors like auto, cement and consumer durables, will also fare well, given the strong economic rebound,” says Roy of Angel Broking. “Rural-focussed sectors such as agrochemicals, two-wheelers and tractors should also continue to do well on the back of a buoyant farm sector,” he adds.

The BFSI sector, hit hard by the postCovid plunge, is expected to recover. “Indian private banks now have the best-ever capital and liquidity position in history… we also like insurance as a good structural theme,” says Rajguru of Julius Baer India.

Private banks with high-quality assets will be good bets. “They will perform well as credit growth comes back with economic recovery,” says Cheruvu of Validus Wealth.

PSUs are likely to improve their returns as well. “A lot of PSUs are trading closer to their book value and have decent returns on equity (ROEs) and dividend yields, and hence make for a good investment case,” says Rajguru of Julius Baer India.

There will also be scope for select good picks in infrastructure “We are positive on the cement,” says Roy of Angel Broking.