R Venkataraman, Managing Director, IIFL Securities, & Co-Promoter, IIFL Group, explains what is in store for the markets in 2021 and which themes will play out. Edited experts:

2020 has been a roller-coaster ride for the market, but is heading towards a happy close. What is in store for 2021?

Better-than-expected earnings and a sharp rebound in economic activity have helped sustain the rally in the last few months. However, some of the high-frequency data like Manufacturing PMI (56.3 in November from 58.9 last month), electricity generation (approximately 4 per cent YoY growth in mid-November vs. nearly 10 per cent YoY growth in late October), and contraction in diesel sales in the first fortnight of November point to moderation in recovery pace. Lost jobs, income loss, rising commodity prices and high inflation are all risks to growth recovery sustenance beyond H1-2021. That said, consensus estimates see earnings upgrade, and nearly half the growth over FY20-22 will be driven by commodity companies and private banks.

Suddenly, FPIs are pouring in record money into the Indian markets. Why do they believe in Indian markets now? What has changed during this pandemic?

India’s GDP growth is expected to see one of the sharpest rebounds among peer EMs. Also, India has a very strong external account position as we could see a current account surplus of about 0.8 per cent of GDP in FY21, and FX reserves have ballooned to $575 billion. While capital flows are putting upward pressure on the Indian rupee, expectations of a stronger rupee are further encouraging flows.

Do you think this trend (of fund flows from FPIs) will sustain?

Globally, there has been a powerful pivot towards risk-on sentiment, resulting in flows into equities, especially EM equities, and India is getting a bit more than its share. This is because of news of a number of vaccines in quick succession, excellent corporate results in several countries in the third quarter of 2020, Biden’s win in the US elections giving rise to expectations of a widespread international rapprochement after a tempestuous period of four years under President Trump, and an end to bickering about a significant fiscal stimulus. There is enough here to keep us going till the first half of 2021. After that, one has to re-evaluate global risk sentiment.

Some experts are ringing the warning bell on the Indian markets given the current PE valuation of Nifty/Sensex... Your take...

Indian equities have been trading at considerable premium to their own history and also compared to peer EMs since last few years, and now fallen risk-free rates have caused further multiple expansion. Higher commodity prices, especially agricultural commodities, could feed into domestic inflation, which is already at elevated levels. This could put upward pressure on yields and cause multiples to retrace.

Which theme will play out in 2021?

Private banks (market share gain), insurance (resilience and growth visibility), auto (sector recovery after a very poor 2020), chemicals (market share gain from China in manufacturing), agro chemicals (global agricultural commodity inflation), pharma (US generics price compression ending, strong launch pipeline for some Indian players in the US, steady market share gains in India pharma market) are some themes. If food inflation spills over and rural wages rise, rural demand will look up and hence, businesses with relatively stronger linkages to rural economy could also outperform.