Will it be bubble, bubble or toil and trouble for the stock market in 2021, asks A L I Chougule

After a year of massive volatility, according to market observers, the bull market record streak has room to grow this year. Skeptics might say that after a V-shaped rally in the Sensex and Nifty 50 since their lows of March 2020, the stock market may soon run out of gas. But historically speaking, it’s been seen that the second year of the previous bull market has been rewarding for investors.

People who are bullish on the equity market think that the bull market is set up potentially for a better-than-average first two years, based on the experience during the 2008-09 financial crisis and an expected rebound in strong earnings. The reason: fiscal and monetary stimulus, combined with pent-up demand during the pandemic should help bolster a recovery once the economy opens back up.

In recent weeks, global markets have been roiled by news about Covid-19 variants causing a spike in infections and fatalities in the UK, Brazil, Italy, South Africa, India and the US. Markets have also seen bouts of selling, though very briefly, by news of rising bond yields in the US. Inflation too is a worry that could reverse broader market gains, especially in expensive growth stocks. Currently, the market is struggling to reclaim its recent highs; neither is it going down decisively, although the sentiment is negative.

Mixed bag

The see-saw movement implies lack of buying support, as also absence of sustained selling pressure. But not everyone is overwhelmingly bullish: some are reasonably bullish; others are prudently positive. They expect an upside of anywhere between 10 to 12 per cent in market indices. But there is a section of analysts and investors who think the market is likely to correct; the expected downside is anywhere between 5 to 15 per cent. Which of these two scenarios are likely to play out in 2021?

After an event-driven collapse, the massive recovery that the Indian and global markets saw in 2020, was a complete surprise. The flash crash, according to market experts, resembled the 2000-01 and 2007-08 crashes. Event-driven bear markets, according to Goldman Sachs, experience about 30 per cent declines on an average. Such bear markets, triggered by exogenous shocks take about 15 months to rise to their previous levels.

Event-driven refers to things like war, oil price shock or an emerging market crisis. Never in the past had markets entered a bear phase because of a viral outbreak and therefore, the pandemic-induced crash was different from previous event-driven declines. Though bearish trends were visible last year, no one had a clue that the market would come out of the bearish scenario within a few months of having fallen over 30 per cent from the highs of January 2020. But not all bear markets are created equally. What rescued the market from the sudden slide was the fire-fighting measures by governments and central banks globally.

Further rally?

So, while the pandemic was spreading and governments were busy fighting the spread of virus with lockdowns, restrictions and fiscal stimulus to tide over the crisis, stock markets around the globe kept getting bubbly on the back of easy liquidity. Now many people expect the market to rally further, as the global economy reopens and vaccination picks up pace around the world. But can markets keep on going up when economies are not back to their pre-pandemic levels and corporate top lines are still not good enough for share prices to command a higher premium? That’s the question which has no easy answer.

But a possible scenario that is likely to play out, according to some market experts, is that if the pandemic is contained by the middle of this year, pent-up demand will boost corporate sales and profitability, which in turn, will add to global economic recovery and, therefore, higher levels for markets cannot ruled out.

There is a contrarian view too. The consensus growth forecast for the world is estimated to be around 5 per cent for the next financial year and for India, it is expected to be around 10 per cent. However, while the impact of the release of pent-up demand on the economy will be very positive, it will be very negative on personal savings. This means, as people spend more on consumption, they will not have excess money to invest in the market. This implies that while the economy will grow, markets will struggle to go up for lack of buying support.

Add to this the impact of rising prices of commodities, particularly oil, inflation, hardening bond yields and a gradual shift to higher-interest rates, they could all bring an end to the extraordinary bull run in a growing global economy. Thus, the risk of a downside to the market is as plausible as the possibility of a strong recovery in consumption demand and overall economic growth.

US bonds

But what if the markets do not fall? Will they go up and how much? The Indian market has been witnessing bouts of volatility because of rising bond yields in the US and concerns over rising inflation. Through most of February and till the middle of March, the market has witnessed strong sell-offs, followed by a gush of buying, which indicates cautious mood of the market.

The market has been closely observing the movement of bond yields and has been reacting to global cues on a daily basis. But this is said to be a short-term concern, as the undertone remains positive and most brokerages and market experts continue to remain bullish on Indian equities from a medium to longer-term perspective. The reason: they believe strong growth recovery of FY-2022 and encouraging earnings of corporate India will be a big boost to market sentiment.

This does not mean there will not be many bumps on the road, as corrections are part of the bull market. A major bump will emerge when the Fed starts tapering – gradual reversal of a quantitative easing policy. However, if the earnings growth gains steam, market players believe equities will follow the earnings growth. This scenario is based on superior growth prospects: FY-22 witnessing around 12 per cent GDP growth and around 25 to 30 per cent corporate earnings growth due to the low-base effect.

If such a situation plays out, market players believe the underlying strength of Indian equities will remain intact. So, where will the indices be at the end of 2021? Axis Securities has been reported to have upped the Nifty target to 17,200 on ‘strong Q3 earnings, solid structural trends, continued FII inflows and positive market sentiment’. That’s an upside of 13 per cent on Nifty, which corresponds to around the 57,000-level on the Sensex. Not a bad deal for investors.

The writer is an independent senior journalist.

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