‘Indian shares could see inflows of $15-20 billion next year’

By Urvashi Valecha

If 2020 was a rollercoaster ride for investors, the New Year may be no different. Any reversal in liquidity could trigger a sharp reversal in the markets. Market strategists anticipate that the recovery in the economy that is expected to play out next year will give a boost to the equity markets along with the upgrades in corporate earnings.

Capital flows, which have driven markets to record highs in 2020, are likely to sustain in 2021. Experts believe that Indian shares could see inflows to the tune of $15-20 billion next year that can push valuations even higher. HDFC Securities is of the view that global liquidity could keep pushing the valuations higher and as a result investors should make allocations to equities keeping in mind a sudden and sharp reversal.

With less than 2% of India’s GDP under constraint because of the Covid-19 pandemic in December and earlier than expected recovery of the Indian economy, markets have rallied from March lows. Strategists expect the theme of economic recovery in 2021 to continue to play out, thanks to the certainty around the Covid-19 vaccine emerging. Amar Ambani, senior president and head – institutional research, Yes Securities, said, “All-in-all, we believe the market will run up ahead of and in anticipation of an ensuing economic recovery. The year 2021, in all likelihood, would mirror the year 2003 from a market standpoint.” The market will also draw strength from a benign crude and commodity environment, government-backed mega manufacturing push in India, lower taxation regime and global players looking for alternative to China.

With the run up seen this year, Indian stocks are only a short distance away from being the most expensive they have ever been. According to HDFC Securities, the 50-stock index (Nifty) is currently trading at a one-year forward price-to-earnings multiple of 27 times compared with its 10-year average of 17.3 times. Even if Nifty’s FY22 and FY23 earnings per share forecasts do not change, the price earnings would have still not reverted to pre-Covid-19 levels. This means that if Nifty’s FY 2022 and FY 2023 earnings per share stay unchanged, price-earnings in December 2021 will be the same as in January 2020, Credit Suisse pointed out in its outlook 2021 report. The foreign investment bank adds that the earnings would be the main driver of market upside going forward. Neelkanth Mishra, co-head equity strategy, Asia Pacific and India equity strategist, said, “We do expect that there can be upgrades to FY 22 and FY 23 EPS so, a high single-digit to a low double-digit increase (in markets) is something that I would anticipate in CY 2021.”

Indian markets have also been one of the most favoured emerging markets when it comes to equity foreign portfolio inflows. Despite the outflow of $8.3 billion in March, the Indian markets have since the start of the year till December 17 seen inflows worth $21.1 billion. This has come in the backdrop of clarity emerging over the Covid-19 vaccine and the diminishing uncertainty over the outcome of the US elections. The momentum, according to Kotak Securities, is expected to continue going forward with the markets projected to receive flows worth $15 billion to $20 billion for the next calendar year. Experts have said that the markets are expected to remain buoyant in the first quarter of CY 2021 thanks to the continuing momentum around the developments regarding the Covid-19 vaccine. Kotak Securities expects that the FPIs would continue pumping capital into Indian equities in the first half of 2021. The brokerage said, “There could be some disappointment coming from the Q4 FY 21 numbers and in the second half we could expect some withdrawal of accommodative monetary policy from central banks.” But, according to HDFC Securities, going ahead the Emerging Markets (EM) are going to do better in 2021 and to that extent, India being part of the EM pack would also benefit.

The midcap and smallcap indices have outperformed the gains made by the benchmarks in 2020. The Nifty Midcap100 and Nifty Smallcap100 index gained 21.3% and 18.47% compared to 12.9% of the Nifty from the start of the year till December to date. Experts believe that in 2021 too, the midcap and smallcap stocks will continue to remain in favour if the low interest rate environment continues. HDFC Securities, said, “Data shows a high correlation between repo rate and the ratio of mid cap index to Nifty 50, again suggesting a likelihood of outperformance over the Nifty in the coming year if interest rates continue to remain low.” Investors usually invest in midcap and smallcap stocks in anticipation of higher returns, given their potential to report increased profitability and gains in market share.