What will drive share market rally in 2021: Strong Q3 earnings, improved economy; but valuation concerns loom

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January 13, 2021 3:56 PM

Indian share market rallied 15 per cent in the last calendar year 2020, driven by foreign fund inflows, investor sentiment and strong fundamentals.

Nifty, stock marketThe AMC said that government spending will remain higher in the second half of the fiscal 2021, over the previous year. Image: Reuters

Indian share market rallied 15 per cent in the last calendar year 2020, driven by foreign fund inflows, investor sentiment and strong fundamentals. During the year, foreign institutional investors (FIIs) pumped in $23 billion into the Indian equity markets. Moreover, the number of demat accounts opened during the financial year 2020 was at the highest in at least 10 years at 4.9 million — a 22.5 per cent increase from the 4 million demat accounts opened in the previous year. India had 40.8 million demat accounts at the end of fiscal 2020, as compared to 35.9 million on March 31, 2019, according to Kotak Mutual Fund.

Momentum likely to continue in calendar year 2021

 Sequentially, economic activities witnessed improvement on the back of fiscal stimulus by government, deft management by RBI through liquidity, rate cuts and stability in the financial sector. Moreover, a drop in COVID-19 active cases was seen despite unlock phase in the economy. Kotak mutual fund expects this momentum to continue in the calendar year 2021 as manufacturing and services PMI came above 50. Also, it expects a bumper rabi season due to above-average monsoon. On the COVID front, it believes that vaccination will reduce the threat of a second coronavirus wave. The AMC also said that government spending will remain higher in the second half of fiscal 2021, over the previous year.

But, don’t go overboard on equities

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company, has advised investors to not go overweight on equities at the current valuations and should look at fair asset allocation strategies. During a virtual press conference, Nilesh Shah also said that while the stock market is still not in a bubble zone, there is little optimism. At the end of December 2020, Nifty 50 index was valued at P/E (x) one year forward of 21.7 times, a premium to the long-term average of 17.9 times. While Nifty P/B (x) of one year forward was valued at 3 times which is at a premium of 3 times to the long term average.

Next 4-5 quarters may see upbeat corporate results

For the year 2021, Harsha Upadhyaya, President and CIO – Equity, Kotak Mahindra AMC, said that data such as December GST collection was at Rs 1.15 lakh crore which was the highest monthly inflow since its implementation. Also, in the last month of 2020, the country’s power consumption grew by 6.1 per cent, India foreign exchange reserves hit all-time high and freight loading increased by 8.54 per cent during the month as compared to last year. Upadhyaya expects October-December quarter to be quite strong; and subsequently, January-March 2021 and April-June 2021, quarters to be even stronger. Overall, he believes, India Inc may witness four-to-five strong consecutive quarters. “Any hiccups in earnings growth may impact markets,” he added.

Nilesh Shah added a word of caution, saying that the third-quarter earnings of the current fiscal will indicate if the September’s earnings growth momentum will sustain.

Upadhyaya also expects substantial earnings growth in FY22 and overall better cost-efficiency. Profitability also looks to continue to remain strong. All the sectors may post positive growth in the October-December quarter on the back of a broad-based recovery in the market. Further, rerating in some cyclical is expected. The overweight sectors include private banks, insurance, auto, cement, among others. Nilesh Shah said that CY21 will get a boost from FPI’s inflows, MSCI rejig and investor preference for the asset class.

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