2021: A Year of Promises and Hope

The year 2020 started on a note of zeal and enthusiasm as seeds of economic recovery which were sown in the form of the government’s tax cuts and RBI’s expansionary policy had set a perfect stage for a golden period of economic growth and revival of the earnings’ cycle. Riding on this belief, the markets hit a fresh all-time high early in the year and it looked like the beginning of the mother of bull markets! Soon, however, all hopes were dashed as the world came to a standstill and mankind witnessed what had not seen for almost the past 100 years. The spread of the corona virus across the globe led to subsequent lockdowns in many countries, all of which created chaos in the commodity and equity markets across the world. 

With this unimaginable crisis, the return of ‘Karan-Arjun’ i.e. hopes of economic growth (Karan) and revival of the earning cycle (Arjun) twisted into a distant dream. But like any typical Bollywood story, the twists and turns led to a happy ending. The markets too witnessed a V-shaped change of fate with the Nifty almost touching the 14,000 mark in the final trading session of the year 2020. Two key catalysts for recovery in the market, not only in India but globally, were the unprecedented liquidity unleashed into the global financial system by the leading central banks of the world and the historically low interest rates which underpinned the famous quote of ace investor Warren Buffett: “Interest rates act like gravity on stock prices.” 

So, in a nutshell, the year 2020 closed much like it began with the stocks in a bull market, notching fresh all-time highs with hope and anticipation of improvement in the economic data. The only thing which is different this time is that there is fear of the unknown engraved in the minds of investors, especially since a new variant of the virus has raised its ugly head. At the same time, development of a vaccine and claims that the vaccine is effective against the new variant is providing the required courage to adopt risk on mode. The Nifty has delivered double-digit return of 14.90 per cent in the calendar year (CY) 2020, which is better than the last two years as in CY 2018 and 2019 when Nifty delivered returns of 3 and 12 per cent, respectively. 

Moreover, 68 per cent of the Nifty 50 components had delivered a positive return with the top five gainers belonging to pharmaceuticals and IT. The markets have run up too much too fast with regards to popular perspective valuations parameters such as the PE ratio. The Nifty PE ratio is at a 4-standard deviation, which is a rare phenomenon. With all this at the forefront, the focus would once again shift towards economic growth and corporate earnings. As such, we are entering into the year 2021 with divided opinions regarding economic growth and corporate earnings. The sceptics argue that the green shoots which we are witnessing in the economy are a function of the pent-up demand and the revival in the earnings which we had seen in the corporate earnings in the currently concluded quarter could be attributed to costsavings, especially financing cost and raw material advantage.

Meanwhile, the optimist sees that the global economy is on the cusp of an expansion cycle and a major driving force of this cycle is the ultra-loose monetary policy. We believe there is a high probability that the view of the optimists would turn out to be true in CY 2021 and the current bullish phase in the markets would expand further. However, in the first quarter of CY 2021, the markets are likely to go through a volatile phase as the immediate risks for the markets are in the form of material rise in bank NPAs, inadequacy of the vaccine and surging cases of corona virus leading to a fresh round of restrictions which could dampen hopes of economic recovery. But this volatility period would provide opportunity for investors to enter into quality stocks! With this we would like to say good bye to 2020 and wish our readers a joyous New Year, and a profitable 2021 ahead. In 2021 we would continue to remain committed to keep our investors and readers with credible updates on markets and new emerging themes for investing.