The tremendous recovery in the stock exchanges after falling 36% between February and March 23, 2020, surprised many as it coincided with the spread of the coronavirus, and recently with the appearance of a more powerful mutant form of the virus in that moment, even as the promise of a vaccine since November had raised hopes for a quick return to normalcy. As we move into 2021 and Indian regulators deliberate on whether to approve the use of Covishield, the Serum Institute of India's version of the AstraZeneca-Oxford vaccine, there is a sense of optimism among the public, investors and market players. Sensex (along with Nifty) is up more than 80% from the year low on March 23 and 15.7% in the calendar year, better than 14.4% in 2019 and much more than 5.9% in 2018. Who would have thought that March 2020 would end up with more than 15% positive returns for investors. However, the national and global economic recovery, which forms the basis of sustainable market growth, is still a work in progress amid concerns in several respects. We need to be careful about expectations starting in 2021, considering that the 2020 recovery was driven by excess liquidity and was not based on the fundamentals of the economy. If that money came back, it could lead to a correction. There are several factors or risks that the market is likely to face this year.
- Inflation: The biggest problem the market can have to navigate is a possible reversal in the flow of funds. Since countries around the world have near-negative interest rates, causing money to flow to emerging markets, including India, the market feels like a mere sign of a surge. Interest rates can potentially derail this currency inflow and reverse the trend. Experts say that if no country can afford to raise interest rates significantly, as this would risk reversing growth at this point, a change in position could lead to capital outflows from emerging markets to developed economies. While REITs (foreign portfolio investors) can afford to take risks, many feel sensitive to external interest rates. So every time the United States indicates that it will move from accommodative to tighter monetary policy, REIT money will begin to flow back into US Treasuries. This is a huge concern this time around as the biggest factor driving markets higher was abundant global liquidity. Between April and December, REITs injected a network of Rs 2,18,291 crore into Indian stocks, the highest of all years. In fact, entries in November and December only amounted to a record Rs 1,22,373 crore. Even the RBI governor, in his monetary policy statement in December, said that as investors left the safe havens of US Treasuries in search of higher yields, “capital flows increased. India”. However, factors such as rising inflation and a change in the direction of interest rates by central banks can cause a reversal of FDI flows and have a negative impact on equity markets.
- Vaccination speed: While the surge in the stock market due to abundant liquidity and cash flow was the story of 2020, it will need to be replaced by one based on economic recovery and growth: consumer demand, investment from the private sector and job creation, among others. This will be critical not only for gdp growth and corporate earnings, but also for the long-term sustainability of capital investments, from both domestic and foreign investors. And for that to happen, India will have to show the speed of its vaccination program and the effectiveness of the vaccine, as this will give confidence to the masses, companies and foreign investors. Many believe that the pace of vaccination will give people the confidence to spend and invest. This would result in demand generation and revenue growth for businesses (which has been absent for the past two quarters) and reflect economic growth and recovery. However, any failure in the vaccination program would reduce market confidence and the economy's ability to recover more quickly.
- The covid-19 threat: As a vaccine is on the horizon and regulators in India deliberate on approval of Covishield, the emergence of a more potent virus variant in the UK has reminded the world that the threat persists being very real and can potentially delay the return to normalcy. As countries have once again restricted air travel to the UK, announcing closures and curfews, markets have seen a sharp correction and remain threatened. A country's ability to control the spread of the virus and to control new mutant forms will be critical to its recovery process. The country that can best demonstrate this will see a return to normal more quickly; however, a country that does not could be on a rollercoaster ride. Market participants believe that if the next phase of the spread of Covid-19 is not severe and vaccination is effective and efficient, the economy will return to normal more quickly.