At the cusp of a new cycle

The year 2021 should see a transition at multiple levels — from virus to vaccine, from lockdown to reopening, from recession to recovery, and from a narrow rally to broad-based rotation — leading to a cusp of a new cycle. Overall, a ‘Goldilocks’ macroeconomic backdrop (strong growth and low rates) for equities is driving risk-on sentiment globally, which should benefit emerging markets like India.

The Indian economy is also at an inflection point. The Covid-19 vaccination should start from mid-January. Economic activity is at pre-Covid levels and rural economy continues to be resilient.

Consequently, economic growth estimates are being upgraded. India’s growth has the highest catch-up potential after major reforms announced by the government.

Prior to Covid, India’s GDP growth was below 6 per cent, but post-normalisation, it could sustain at 7 per cent over the next five years.

We are now entering an earnings upgrade cycle after a long time, which should drive markets going forward.

FY21 and FY22 earnings estimates had seen sharp downgrades between February-end and September. However, after September, the trajectory has stabilised, and EPS estimates are being upgraded across sectors. Cyclicals such as metals, auto and cement have surprised positively.

Corporate performance has been robust in Q2 FY21.

Earnings are projected to rebound sharply, and Nifty 50 earnings CAGR in FY22-24 can be higher than the long-term average of around 11 per cent.

Earnings rebound is likely to be led by digital economy, deep cyclicals and domestic consumption themes.

Economic recovery and abundant liquidity can drive the bulls in the Indian equity markets. The outlook on most sectors is turning positive, giving a lot of comfort on the recovery.

Domestic cyclicals and financials can do well in 2021.

After the recent rally, markets seem fairly priced in the short term.

Markets could see a minor correction, but it is difficult to time the market.

Upgrades to economic growth and earnings estimates can provide upside.

In this environment, it would be best to take a three-year view. From current levels, we can expect a 10-12 per cent CAGR return for the Nifty 50. During economic recovery, mid- and small-caps typically do well and could outperform large-caps. Market breadth improving can provide opportunities for active funds to generate alpha.

Investors should stay invested, continue their SIPs, and buy into any dips.

Lump-sum investments can be spread out over next few months.

Excerpts from Annual Investment Equity Outlook 2021 of Aditya Birla Sun Life Mutual Fund