Market did well in 2020 and exponentially well from the low of March 23, 2020, even though the economy was heavily impacted by the pandemic. During the period some sectors like IT, Pharma, Chemical & Staples did much above the broad market. In 2021, we are seeing that the best performers of 2020 are underperforming to the rest of the others and the broad market is also rallying better. This is because the stocks and sectors directly associated with the economy are performing better. At the same time, we can also notice that the market is also getting a higher dose of volatility compared to the one side rally of 2020. This change in momentum from new normal to normal is bound to stay in the short-term along with the wave of volatility noticed.
This change in trend is triggered by the movement of the economy towards normalisation, from recession to a long rate of growth. By the end of 2021, the risk of COVID is likely to be minimum. The core economy has already started to benefit from a higher rate of production. Higher investment is also expected for the industrial & manufacturing sector in the future.
New normal (economy or doing of business during pandemic) benefited mostly technology, healthcare and consumption sector, as a new and stable source of ongoing business. Their outlook also expanded, high liquidity introduced in the economy also helped them because they were looking for the most non-risky assets in equity, debt & gold.
Let us also note that this benefit is bound for a long-time, given the need for digitalisation and healthcare-technology products & services. Additionally, the outlook for the healthcare sector in India was boosted further by the approval of the PLI scheme in Pharma, API and Chemicals manufacturing. For the IT sector, global digitalisation, the adaptation of new technology like cloud and improved US policy updated the outlook. The performance of both the sectors during YTD is muted, being the best performers of 2020 factoring all the short to medium-term gains. But we feel that the trend of outperformance should continue in the medium to long-term since it has further room for upgradation in valuation with higher investments.
The act of normalization, the movement of the economy towards the long-term growth rate, will bring a change in the performance of the equity market going forward. The improved outlook for the normal economy will give an edge to industries supported by the higher movement of funds to cyclical stocks.
On the economy macro front, the biggest risk will be the rise in inflation leading to a surge in bond yield. It should not be a surprise for the market since high growth is needed and will lead to a higher interest rate. It can trigger short-term volatility due to reshuffling and increased cost of arbitrage (borrowing in debt & investing in equity). Higher bond yield will also make an investment in debt papers more attractive, so some funds can move from equity to debt in the future.
The trend of inflation and bond yield in the US economy is the most important factor to define the trend of the world equity market. In December 2020 and January 2021, the actual inflation came above the forecasts, while in February it was in line. The forecast is that the US inflation will increase to 1.7 percent by December 2021 from 1.4 percent and bond yield to 2 percent by December 2021 from 1.5 percent, today.
We can forecast that 2021 will be the period of rising economic growth and interest rates, which will be most positive for the old economy. It will help to maintain buoyancy in equity, especially for growth-oriented sectors like cyclicals, industries, infra, metals. The broad equity market should also be positive going ahead given the assurance given by central banks to maintain official interest rates low with enough liquidity to support the economy to move above the pre-COVID level.
It is a good time to review your portfolio and reshuffle by moving some of the poftfolio from very expensive stocks & sectors (new normal) to value and upcoming areas of growth. Please note that expensive sectors like technology and healthcare will continue to do well in the long-term, as discussed. Exposure to the debt segment can also be done based on the risk-averse appetite as yield increases in the future and to develop a balanced portfolio.
Robust buying by FIIs in 2020 driven by global risk-on, triggered a strong rally in EMs, in which India benefited a lot. A short-term consolidation can happen in the global market as the economy moves towards normality with volatile bond yield & inflation. It can also impact the flow of funds to India.
Positively, India’s outperformance is bound to stay in the long-term, supported by a bold Budget, prompting more reforms. During or post this period of likely consolidation, we will have a period of rising inflation, bond yield & equity market because the full benefit of reforms & high economic growth is not factored in the stock market. At the same time, given high valuation and likely reduction in liquidity, the expected rate of return for equity should reduce. We may not match the gains made in 2020, still, we are in a safe market to hold investments-in-hand and invest more on dips. Increasing exposure in growth stocks & holding for long-term gains is also suggested.
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.
