Sensex, Nifty surge 12% YTD in 2020, follow Wall Street gains; will it repeat 2020 rally next year?

By Prem Prakash

The calendar year 2020 has been one of the most volatile years for stock markets and one which market participants are going to remember for a long-long time. It was a year which was full of surprises and would be remembered for a lot of things including the pace with which the pandemic accelerated, the scale of the lockdowns, the government stimulus initiatives, and the magnitude of stock market rebounds.

In January’20, the Indian benchmark indices hit a fresh all-time-high (ATH) of 12430 and in December’20, Nifty was trading at an ATH of 13777 which is almost 1300 points above Jan high but what is to be also noted is that, in this journey, it also made a four-year low at 7511. The year 2020 had once again proved the old saying of the stock market ‘Expect the Unexpected‘. The year has been one of the most volatile years for the stock markets in the recent past. NSE’s Nifty50 has traded in a range of around 6000 points and BSE’s Sensex traded in a range of around 20,000 points. Never ever, we have seen such a broad range for Nifty and Sensex in a calendar year. We have seen the markets grow around 80% from the March lows and around 12% in the calendar year 2020. The performance of Indian benchmark indices was in line with the global indices like DOW, NASDAQ etc.

With respect to the economic activities and GDP growth, India’s GDP contracted by around 24% in the first quarter which was one of the worst among all the major economies across the globe. However, it was also because, to control the spread of COVID-19, India had imposed one of the strictest lockdowns across the world. Also, GDP numbers for Q2 surprised everyone and albeit negative, it was way better than what most of the people estimated. In Q2, India’s GDP contracted by 7.5% and now the expectation is that India’s GDP growth would turn positive in Q3 itself.

India has officially entered recession (as two successive quarters of GDP contraction is termed as a recession) after the declaration of the GDP numbers for the Q2. And as of now, we are in the early stage of the post-recession recovery. This suggests a prolonged period of low-interest-rate growth that favors equities over the bond market. However, we may not witness a similar kind of rally in the stock market as it was in 2020, but the overall trend may continue to be bullish. In the short term, we may face some uncertainty due to the new strains of Corona Virus in the European countries, geopolitical issues in China, Iran, and Russia. Also, the market will keenly observe how the distribution and logistics for the vaccine happens and what is the effectiveness of the vaccine in controlling further spread of COVID-19. All these might lead to a roller coaster ride for the markets in the first half of 2021. However, with the companies posting better results every quarter, we can expect India to post positive GDP numbers in 2021 and markets to respond cheerfully to such performance.

The major event which everyone is looking forward to in 2021 is the announcement of the general budget on 1st February. The government has got a daunting task for the budget with fiscal deficit shooting up to around 7.5% of the GDP.

Considering the recent sharp rally in equity markets, investors should adopt utmost caution while investing. They should do a thorough analysis of their investment objective, time horizon, risk appetite and then plan their investments.

(Prem Prakash is the CEO at CapitalVia Global Research Ltd. – Investment Advisor. The views expressed are the author’s own. Please consult your investment advisor before investing.)