Equities end year of the pandemic posting best returns in last three years

By Urvashi Valecha

Shrugging off the pandemic blues, Indian equities bid adieu to 2020 posting the best returns in three years. The benchmarks have given positive returns for the fifth straight year, with the Nifty returning 14.9% and the Sensex 15.8% in the calendar year 2020. This comes on the back of the rush of liquidity unleashed by central banks and hopes of a faster economic recovery. The latter part of the year saw a sharp rally in the markets primarily due to developments around the Covid-19 vaccines.

The year saw its twists and turns after it started on a sombre note with the markets crashing in March as fear over the economic impact of the Covid-19 pandemic gripped markets globally. The benchmarks crashed by 38.4% in March but have recovered by more than 70% since then.

Despite the outflow of $8.3 billion that the Indian markets saw in March, the foreign portfolio inflows have been robust throughout the year. In fact, at $23.29 billion, the inflows are the highest since 2012. Market experts believe that since FPIs are of the view that the worst of Covid-19 is behind India and the economic recovery has taken place earlier than anticipated, the markets have seen robust inflows in 2020.

Going ahead, Kotak Securities expects the FPI flows to touch $15 billion to $20 billion in 2021. Additionally, experts also anticipate that emerging markets are at the start of an earnings super-cycle. Dhiraj Relli, managing director & chief executive officer, HDFC Securities, said, “Overall, the emerging markets (EMs) are going to do better in the coming year. To that extent, India, being part of the EM pack, would also benefit.”

The biggest gainers of 2020 from Nifty100 pack companies were Adani Green Energy at 532.38%, followed by L&T Infotech at 109.5% and Divi’s Laboratories at 108.14%. Sectorally, the Nifty Bank has given negative returns for the first time in five years at -2.6% but the banking index has been playing catch up and has rallied by 31.2% since September.

Experts believe that with growth becoming the focus for banks in 2021, financials will track credit growth and pre-provision profits. With the recovery in earnings likely to fuel the market rally in 2021, the outlook for stocks belonging to most sectors seems to be improving. Jaideep Hansraj, managing director and CEO, Kotak Securities, said, “We see a sharp recovery in FY22E net profit coming from automobiles, banks, metals and telecom sector.” He also added that as most growth and quality stocks have become fairly valued there is scope for re-rating in the ‘value stocks’ going forward.

The optimism towards economic recovery and subsequently a recovery rally in markets started from May onwards after lockdown restrictions started easing. The bullishness has increased to such an extent that the markets have closed the year at record highs. This rally in the market has been triggered by the rising liquidity globally after central banks slashed their interest rates.

Experts have stated that the markets are now in a ‘developed world central bank’ bull market which means the low interest rates in central banks such as the US Fed, has led to a bull market around the world which will not stop unless there is a hike in interest rates. However, the strong rally in the markets has led to a spike in valuations.

The Nifty now trades at forward earnings multiple of 20 times for fiscal year 2022 estimates which according to Axis AMC warrants caution. In a note, Axis AMC said, “Continued liquidity could keep the market levels elevated but liquidity is a tough variable to model. Globally, India remains in sync with the rest of the world and hence a global liquidity remains a key risk to current valuations.” Besides liquidity, the rolling out of Covid-19 vaccines is also expected to play a vital role in the market rally in 2021.