After a strong rally during the pandemic, markets will take a breather in 2021 and may even correct from the current levels, a domestic brokerage said on Wednesday.
Kotak Securities said the BSE benchmark Sensex will be at 46,000 points at the end of 2021, as against the Wednesday's close of 46,666 points, and cited a shift in stances from major central banks in the world as the biggest factor influencing its view.
The brokerage said a glut of liquidity, which has fuelled the current rally, will be curtailed as the central banks wind-up on the stimulus measures once the COVID infections wane in mid-2021 and the vaccine arrives.
Its analysts said after losing about 40 per cent in the immediate aftermath of the declaration of the pandemic and hitting the lows in late-March, foreign flows have led the markets to an 80 per cent gain.
"The flat (expectation) is on the back of an 80 per cent move in the Nifty in the last nine months. What is wrong to have flattish returns when the long haul looks decent," the brokerage's managing director and chief executive Jaideep Hansraj told reporters.
Its head of fundamental research Rusmik Oza said there will be buoyancy in the first quarter of the new year on moves like the Budget, but as the year proceeds, factors like the pullback of the stimulus measures by central banks across the world may lead to a correction.
In the last few months, as the stocks rallied, many watchers have been voicing concerns over a disconnect between the markets and the real economic activity, which is set to contract by over 7 per cent during the fiscal.
Oza said the valuations of stocks look stretched in the near-term, but if one takes a two-year view, one should not be too perturbed about such concerns.
Hansraj said while the current rally has witnessed heavy buying in the top ten stocks, normalising of activities will lead to a broader set of picks by investors.
The brokerage said the factors to watch out for are movements in currencies, oil prices, COVID vaccine, inflation situation domestically and interest rate movements.
Foreign institutional investors have pumped USD 19 billion till now this year and will be a strong USD 15-20 billion in the next year as well, the brokerage said.
Financial sector stress, weak investment cycle and adverse global liquidity issues are the key risks to the markets next year, but Hansraj said there is a slim chance of a heavy correction.
The brokerage said it prefers select banking stocks, capital goods companies, cement, select consumer goods companies, oil and gas, utilities, metals and mining sector stocks.
Hansraj said he is confident that new Demat account openings, which have topped 10 lakh a month during the pandemic, will continue in 2021 as well because of the low equity market participation in the country.
