The stupendous recovery of the stock markets after a 36% drop between February and March 23, 2020, surprised many as it coincided with the spread of the coronavirus, and recently with the appearance of a more powerful mutant form of the virus just when the promise of a vaccine since November had raised hopes for a quick return to normalcy.
As we enter 2021 and Indian regulators deliberate on approving the use of Covishield, the Serum Institute of India’s version of the AstraZeneca-Oxford vaccine, there is a sense of optimism from the public, investors and market participants. Sensex (as well as Nifty) has grown more than 80% from the year low on March 23, and 15.7% during the calendar year, better than 14.4% in 2019 and much higher than 5 , 9% in 2018. Who would have thought it in March of that 2020 would end up with more than 15% positive profitability for investors.
However, the national and global economic recovery, which forms the basis for sustainable market growth, remains a work in progress amid concerns on various accounts. Be conservative with expectations starting in 2021, bearing in mind that the 2020 rally was driven by excess liquidity and was not based on the fundamentals of the economy. If that money came back, it could lead to a correction. There are several factors or risks that the market is likely to face this year.
Inflation
The biggest problem area that the market may have to navigate is a possible reversal of cash flows. With countries around the world having interest rates close to negative, leading to money flowing to emerging markets including India, there is a feeling in the market that a mere sign of a rate hike interest rates can derail that inflow of foreign money and reverse the situation. trend.
“One more aid package from the United States will have an impact on inflation. Although the immediate impact would be the entry of more inflows, later it will lead to an increase in inflation and that can lead to central banks increasing their interest rates … We have to be vigilant about the same ”, said CJ George, MD, Geojit Securities.
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Experts say that while no country can afford to raise interest rates significantly, as that could knock growth down right now, a shift in this stance could result in capital outflows from emerging markets to developed economies.
While FPIs (Foreign Portfolio Investors) can afford to take risks, many feel they are sensitive to external interest rates. Therefore, whenever the US indicates that it will switch from an accommodative stance to a tight monetary policy, the money from the FPI will begin to move back to US Treasuries.
This is a big concern this time because the biggest factor driving the markets up was ample global liquidity. Between April and December, FPIs injected a net amount of Rs 2.18.291 crore into Indian equities, the highest of any financial year. In fact, entries in November and December only amounted to a record Rs 1,22,373 crore.
As a Motilal Oswal Financial Services report notes, “this would not have been possible without global central banks resorting to an unprecedented synchronized liquidity overload and cutting interest rates to record lows, ensuring the availability of easy money.”
Even the RBI governor, in his monetary policy statement in December, said that as investors emerged from the safe havens of US Treasuries in search of higher yields, “surges of capital flows have flooded India. “.
However, factors such as rising inflation and a change in the orientation of interest rates by central banks can lead to a reversal of the flow of FDI and negatively affect equity markets.
Nilesh Shah, MD, Kotak Mahindra AMC said that the premature withdrawal of the stimulus can create a significant problem for the economic recovery in all countries and therefore it will be very important to see when they start to do so. While everyone is looking at the large publicly traded entities to conclude that there is a recovery, Shah said, “what if the smaller medium and small-scale companies, which are major job creators, are still fighting? If that’s the case, jobs will continue to be affected and demand in the economy will also be affected. For us to have a sustained recovery in the long term, we need a reactivation in the entire segment of the economy and not just in some large companies ”.
Vaccination speed
While the stock market surge due to ample liquidity and cash flows was the story of 2020, it will have to be replaced by one that relies on economic recovery and growth – consumer demand, sector investment. private sector and job creation, among others. That will be essential not only for GDP growth and corporate earnings, but also for the long-term sustainability of capital investment, by both domestic and foreign investors.
And for that to happen, India will have to show the speed of its vaccination program and the efficacy of the vaccine, as that will bring confidence to the masses, companies and foreign investors.
“The greatest risk is related to the vaccine itself, since there are many doubts. The market is assuming that the vaccine will reach and reach everyone, but what if there is a problem where it reaches everyone or contains mutations? All assumptions that normal economic activity will continue are based on efficient vaccination and people resuming normal life, ”Shah said.
George agreed: “Our ability to vaccinate a significant population in a rapid time will be the engine of economic growth.”
Many feel that the pace of vaccination will give people the confidence to spend and invest. That would result in demand generation and revenue growth for businesses (which has been absent for the past few quarters), and would be a reflection of economic growth and recovery.
“We don’t need to reach a large population, only the speed of vaccination will provide confidence and the economy will jump from the lowest base,” George said.
However, any setback in the vaccination program would reduce market confidence and the economy’s ability to recover faster.
The Covid-19 threat
While there is a vaccine in the offing and Indian regulators are out on Covishield’s approval, the emergence of a more potent virus variant in the UK has reminded the world that the threat remains very real and may delay potentially a return to normalcy. As countries once again restricted air travel to the UK, announcing closures and curfews, markets witnessed a sharp correction and remain under threat.
The ability of a country to control the spread of the virus and control the new mutant forms will be critical to its recovery process. The country that can best demonstrate it will see a faster return to normalcy; however, a country that does not do so could be on a roller coaster ride.
Market participants feel that if the next phase of the Covid-19 spread is not severe and vaccination is efficient and effective, the economy will return to normal faster.
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