2020 has been a year of changing trends in many ways, as compared to the narrow market movements in Calendar Year (CY) 18 and 19, where only a handful of large-cap stocks did well. The market rally has been much more broad-based in CY20; the BSE Small-Cap index gained nearly 30 per cent; the Mid Cap Index is up 20 per cent vis-a-vis the losses it incurred in CY18 and 19.
Even amongst the sectors, healthcare sector & IT sector have gained 50 per cent and 40 per cent respectively versus the banking and real estate sectors, which were the big gainers in CY19.
It seems quite evident from the above trends that markets are indicating a positive outlook for CY21. Some of the other developments at corporate level and ground-level changes are also pointing towards an all-round-recovery in the economy and earnings growth.
Some of the key positive developments are:
1. The COVID-19 pandemic has played the role of a catalyst by bringing cost efficiencies and balance sheet discipline across sectors/companies, which is distinctly visible in the Q2 FY21 (Sep 2020) results declared by most of the companies. A slight tail-wind in economic growth (for which green shoots are already visible) and an uptick in aggregate demand will set India Inc. on a multi-year and strong earnings growth trajectory.
2. The companies listed on the stock markets are largely a representation of organised markets. The other important trend is that despite the prolonged lockdown, the organised players in each of the businesses/sectors have restarted their operations very quickly and have displayed a lot of resilience. This has helped the organised sector to gain market share as the unorganised market remained saddled due to labour/capital challenges and could not keep up with the revival of supply.
3. Rural India has been at the forefront in terms of the revival of demand. In fact, COVID-19 had a minimal impact on rural India. On the contrary, owing to the two good seasons of back-to-back monsoons, the green shoots in rural India were evident from late CY 2019 (Nov-Dec) and early 2020 (Jan-Feb), followed by focused spending by the government in rural areas, which created a very buoyant rural economy.
4. Another very important trend has been the play of China+1 strategy on global supply chains. In the post-Covid environment, the world is looking up to India to provide a scalable and credible alternative to China. In some sectors, like chemicals and pharmaceuticals, the first signs of advantage in India are already visible by way of higher enquiries and new orders.
In response to the above opportunity, the government has announced the PLI (production linked incentive) scheme.
The Centre has in total approved the PLI scheme for 13 sectors. Each of these sectors has a huge potential to either scale-up exports or replace imports with domestic manufacturing for internal consumption (Atmanirbhar).
The sectors that are eligible for the PLI scheme are automobiles & auto components, telecom & networking products, advance cell chemistry batteries, pharmaceutical drugs, food products, textile products, specialty steel, white goods, high-efficiency solar PV modules and electronic/technology products.
5. Acceleration of digital adoption across the value chains and stakeholders - customers/suppliers/employees/investors have been an additional catalyst that will drive efficiencies across businesses. In fact, digital transformation has accelerated the growth opportunities for Indian IT services (a very large part of Indian exports $150 billion+).
6. In recent months, we have also observed very good foreign flows. In just three months (Oct-Dec, 20) FIIs have invested a whopping $18 billion+.
7. Another interesting development has been an uptick in bank deposits, the growth in total bank deposits is now at 11 per cent versus around 8 per cent a couple of years back. This leads many to believe that the overall savings rate in the economy may be on a higher side, a good lead indicator for aggregate demand to show an uptick.
Clearly all of the above make one quite optimistic about the CY21 outlook, for both the Indian economy and the Indian equity markets.
(The author is a fund manager at Emkay Investment Managers Limited.)
Disclaimer: The views and investment tips expressed by the expert on are his own and not those of its management. Emkay Investment Managers Limited advises users to check with certified experts before taking any investment decisions
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