Quote by Hemant Kanawala, Head - Equity, Kotak Mahindra Life Insurance Co. Ltd.

If 2020 was a year of Covid infection, lockdown and recession, 2021 will be a year of vaccination, reopening and recovery. As the Covid infection hit the world at the start of 2020, the governments announced lockdown to limit the impact of the virus. This raised the possibility of economic recession and equity markets sold off globally. The government’s priorities were to protect the lives and livelihoods. While medical professionals worked towards protecting the lives and finding vaccine, the governments and central bankers announced record stimulus of around US$21 tn to support the livelihood and the economy. After initial period of lockdown from March to May, it became evident that lockdown was not a sustainable strategy and hence the governments started reopening the economy gradually. The pent up demand due to lockdown along with the stimulus provided by the government and central banks ensured that the economy started stabilising from September quarter. The global economy is expected to contract by 3.5% in 2020 but grow in excess of 5% in 2021. The government worldwide is committed to continue with stimulus till unemployment comes down to pre Covid levels.

Indian government announced number of measures to support livelihood and incentivise manufacturing in India. Long pending reforms in labour and farm sector were also initiated. Indian economy is expected to contract by more than 6% in 2020 but grow by in excess of 8% in 2021. Nifty earnings are likely to grow by high single digit in FY21 but it will accelerate to more than 20% in FY22 on the back of economic recovery and higher margins due to better cost management.  FIIs have invested more than US$ 20 bn in Indian equities in CY20 while DII have sold more than US$ 3 bn led by redemptions in mutual funds. Although it is difficult to estimate FII flows, India and emerging markets may continue to get the flows on the back of US dollar weakness.  Nifty is trading at P/B of 4, which is close to its post GFC high. This implies that market can offer limited gain from valuation rerating and most of the gain will be driven by earnings. If there is any disappointment on this front, then markets can correct.

There are two main risks to be careful about in 2021. First is inflation. Although the stimulus provided by the government may help in solving today’s economic issues, it can bring back inflation which was missing for most part of last decade. Inflation can also go up due to deglobalisation, which started with Brexit in 2016, gained momentum with US China trade war and has accelerated post Covid. Second is change in regime in USA. Mr Joe Biden will take the oath as US president in January 2021 and it can potentially change economic and geopolitical priorities of USA.