Why This Bull Market Can Continue After a Brief Pause

Published by Sharekhan Education | March 23, 2021

Why This Bull Market Can Continue After a Brief Pause

After the meltdown in March 2020, Nifty 50 has jumped by more than 80%. India has so far recovered well from the severe pandemic, which seems to have peaked out in the country in September. If we were to gaze into a crystal ball for 2021, the current bull market is likely to extend to 2021 as the global economies (including India) see normalization over the next 6-12 months. Our positive market outlook is based on the below-mentioned pointers.

The unprecedented stimulus to continue: Magnitude of fiscal stimulus for Covid-19 crisis is massive compared to the subprime crisis in 2008. In India, the stimulus as a percentage of GDP is 6.9%. All major economies have pledged further liquidity support in the future.

Global interest rates to remain low: Major central banks such as FED and ECB have reduced interest rates to near-zero to address the COVID-led crisis. The emerging economies, including India, have also reduced interest rates to historic lows. RBI has mentioned its pro-growth stance. Thus, policy rates in India are likely to remain unchanged in the foreseeable future.

Dollar weakening to benefit Emerging Markets: Dollar continues to decline against a basket of major currencies as a bigger stimulus package in the US after Joe Biden’s victory prompts more investments into emerging markets like India. The rupee remains stable with RBI’s intervention to boost exports and bring more foreign funds as Indian forex reserves continue to climb to record highs.

Indian equities remain a favorite for FIIs: India has remained one of the favorite FII destinations for investment in equities among emerging markets. In one year, India saw inflows exceeding $18 billion while most Asian peers apart from China are still YTD negative.

Strong rebound in earnings: Economic Recovery has been faster than many expected after the unlock process and the RBI now expects the economy to contract by 7.5 percent in FY21. With the worst of asset quality concerns behind us amid the resolution of big-ticket stressed assets and economic optimism in the post-Covid era, we expect Nifty earnings to grow at a CAGR of 17.5% during FY20-23E.

With vaccine deployment under process, we are looking at the light towards the end of the tunnel.

There are several positive factors that can drive the markets further up. However, the valuation is fully factored-in by the markets and thus the markets could correct for a brief period of time before it again starts to move up.

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