3 min read.Updated: 16 Mar 2021, 05:19 AM ISTTrideep Bhattacharya
The story of 2020 was about liquidity. 2021 may see a shift in investor behaviour
Our journey into 2021 has commenced on a bright note, with most of our conversations now revolving around vaccines and lives returning to complete normalcy. The year 2020 was a blur which involved most of us being confined to the spaces of our homes as the pandemic ensured lockdowns, the fear of an intermittent recession converting into a full blown one, stress on company balance sheets as businesses were shut and a host of liquidity measures needed by global central banks to ensure the economies do not slip into a deeper recession.
As we move into 2021, we are witnessing three key transitions from an economic stand-point:
From virus to vaccine: While most of our discussions in 2020 revolved around the virus and the contagion effect, 2021 brought cheer as we begin inoculation and the process of returning to normalcy. In India, we currently have two vaccines (Covishield and Covaxin), which will be rolled out in a phased manner to citizens (across the age bracket) in the fight against the virus.
From recession to recovery: In 2020, India reported its worst quarterly GDP print as a complete lockdown meant closure of business activity. The Q1FY21 GDP was reported at -23.9%, thereby dragging FY21 growth to -7.5% in spite of a recovery in the subsequent two quarters. Compared to this, the Indian economy is likely to report a GDP growth of 11.5% in FY22.
from lockdown to reopening of economies: From March 2020, we witnessed the most stringent lockdown compared to any global economy. As the cases peaked in September 2020, the gradual reopening of businesses brought movement of goods and services, bringing relief to businesses affected due to the lockdown.
Likewise, from an equity market perspective, we are witnessing three key transitions:
From liquidity to fundamentals: In 2020, central banks pumped in liquidity worth 13-20% of GDP within the first few months of the crisis, which lead to a strong rally in equities across the globe, including India (the Nifty 50 is up 75% from the March 2020 lows). In 2021, we expect earnings estimates of companies to rebound in a meaningful way, as reflected in a 5% decline in FY21 to expectations of a 32% growth in earnings in FY22 (Nifty 50 Bloomberg estimates).
From pe expansion-driven rally to earnings-driven surge:While share price movements in 2020 was mainly driven by expansion of price-earnings (PE) multiples on account of strong global liquidity, we expect stock-specific earnings upgrades to drive share prices in 2021.
From unorganized segment to big brands: In the post-pandemic era, we expect key brands within each sector, or the industry leaders, to dominate the recovery process. One of the largest biscuit manufacturers gained significant market share over the past one year at the expense of the unorganized sector, while a top private bank continued its dominance and gained market share at the expense of its public sector peers. We expect the trend to amplify as consumer’s preference towards brands, which was accentuated during the lockdown, continues to gain momentum going ahead.
On net balance, while the story of 2020 was more about liquidity, 2021 will likely see a transition in investor behaviour as the focus shifts back to market fundamentals. With most sectors now functioning at pre-covid levels and investor expectations running high, we believe sustainable investor returns from hereon will come through in those stocks that see a strong earnings delivery, going forward. Hence, a combination of a professional money manager, along with an astute stock picking approach, is the investors’ best bet for the road ahead.
Source: Bloomberg, Axis AMC Research
Trideep Bhattacharya is senior portfolio manager , alternative equities, at Axis AMC.