Motilal Oswal Financial Services Ltd

Published on 30/12/2020 12:45:51 PM

Below are Views On Tale of 2020, The Fall and Rise of Stocks By Motilal Oswal

Equity markets had a historical journey in 2020, as it marked a year of huge volatility, unpredictability, pessimism, divergence and optimism. The markets touched all time high of 12,431 in Jan’20 and then hit 3 year low of 7511 in Mar’20 as COVID-19 pandemic grips the whole world, becoming one of the biggest threats to the worldwide economy.

The unlocking of the economy since Jun’20 has led to significant recovery in various macro, micro and high frequency data points, resulting in equity markets surpassing its previous lifetime high once again. Further strong FII inflows, good corporate earnings season, and the encouraging trends from the festive season, suggests that the demand recovery is likely to continue. Nifty is up +14% (till Dec 24, 2020) since last year while Midcaps and smallcaps outperformed Nifty and is up +23%/+21%. 

The significant feature of equity market performance in 2020 has been the sharp divergences both across and within sectors and companies - highlighting the differentiated impact of COVID on various sectors. Clearly, the essentials (Healthcare, Staples) and Technology/Online/E-Commerce businesses were impacted far lesser than the Financials, Cyclicals and Discretionaries. In fact, for Healthcare and Technology sectors, the pandemic acted as a tailwind, which can be gauged from their sharp outperformance in 2020 – Pharma/IT up 59%/49%. On the contrary, Financials, especially PSU Banks, bore the maximum brunt of COVID, down 30% YoY.

FII inflows saw strong momentum in Nov’20 with best ever monthly inflow of Rs65,200 crore and this has continued in December too. For the full year, FIIs inflow stood at Rs 1,10,000 crore (till Dec 24, 2020), while DII inflows remained negative (-Rs74,000 crore).

As we enter 2021, the markets is sitting at all-time high and is showing resilience on the back of abundant liquidity, positive developments on the vaccine front and signs of economic recovery. More importantly, COVID-19 cases have seen a meaningful decline. Improved corporate earnings have also buoyed the market sentiments. We expect Nifty EPS growth of 6.9% in FY21 while expecting a sharp rebound of 36.2% in FY22.

Thus, the overall structure of the market remains positive. At 20x FY22 earnings, Nifty valuations is also not very expensive as it is trading closer to its long-period averages of 19x. With the economic activity continuing its recovery, it could lead to start of earnings upgrade cycle. Further liquidity flows across Emerging Markets could remain strong which bodes well for Indian markets. However, intermittent corrections cannot be ruled out as there is a risk of second wave of Covid-19 and thus sustenance of economic recovery holds the key. From next 12 months perspective, we are positive on IT, BFSI, Healthcare, Telecom, Auto and Consumer.

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