Top factors that will shape trajectory of Indian markets in 2021

The top three Covid-19 vaccines that are currently awaiting the government's approval in India are: Pfizer and BioNTech, Oxford-AstraZeneca and Bharat Biotech's Covaxin

Calendar year 2020 (CY20) was a 'best of times, worst of times' moment for the Indian stock markets, during which the benchmark indices plunged to multi-year lows in March after the number of Covid-19 cases worldwide exploded and the Indian government subsequently implemented a nationwide lockdown, only to then roar back and hit fresh record lifetime highs near the year-end.

On a year-to-date (YTD) basis, till December 21, 2020, the S&P BSE Sensex and the Nifty50 have gained 13.4 per cent per cent and 12.8 per cent, respectively. The one-sided rally since March has pushed the 12-month forward price-to-earnings (P/E) multiples for the Nifty50 index up by nearly 20 per cent during the same period, prompting Credit Suisse to point out that Indian equities are no longer cheap, and only a short distance away from being the most expensive they have ever been.

Nevertheless, as investors leave a year full of uncertainties behind, a host of domestic as well as foreign factors that will have bearing on the Indian markets awaits them.

Here is a quick look at the factors that will play a key role in how the markets shape up in the next year.

Covid-19 infection trend and roll out of vaccines: The efficacy of coronavirus vaccines and roll-out of vaccination programme is likely to be among the biggest market drivers for the next year. India recently crossed the grim 1 crore-mark in Covid-19 case tally even as the daily cases have reduced significantly from the peak and recoveries surged to 95.5 lakh, according to Union health ministry data.

As for the vaccination drives, they are already underway in the United Kingdom (UK) and the United States (US). On Sunday, Union health minister Harsh Vardhan said that in any week of January, India can be in a position to give the first Covid vaccine shot to its citizens. The top three vaccines that are currently awaiting the government's approval in India are: Pfizer and BioNTech, Oxford-AstraZeneca and Bharat Biotech's Covaxin. Besides, analysts say that the government's response to a potential second wave of the infection will also be crucial.

Corporate earnings: A Reuters poll of equity strategists showed that they overwhelmingly expect corporate earnings to return roughly to pre-pandemic levels within a year. Credit Suisse concurs with this view, with the brokerage saying that next year, the upside shall be triggered by corporate earnings. "12-month forward earnings have begun to rise sharply as more of 2021 is included in forward earnings," Credit Suisse said in a recent note.

"Even if Nifty and FY22 and FY23 EPS forecasts do not change, the P/E would have still not reverted to pre-Covid levels," the brokerage said. It expects 50-60 per cent of the year-on-year (YoY) EPS growth expected in FY22 to come from private banks, consumer discretionary and energy.

Axis Securities has also raised their earnings estimates for FY21 and FY22 by 6 per cent and 8 per cent, respectively, and introduced FY23 earnings. "Value plays like metals, banks, NBFCs and others have started delivering solid returns but also the small and midcap space marked by discretionary consumption, retail, autos and others have delivered returns," it said

Union Budget: Finance Minister Nirmala Sitharaman has promised a "never before" like Union Budget as the government looks to steer the pandemic-battered economy and push growth. At present, the government is engaging with the industry before the budget and taking their feedback on various newer challenges they will have to face. Soon after holding her first pre-budget consultations, the Finance Minister said that "investment in research and development in medicine, biotechnology, and pharmaceuticals were the need of the hour." 

On the other hand, independent market analyst Ambareesh Baliga isn't expecting an investor-friendly budget in 2021. "The government is clambering for funds, and so one shouldn't expect an investor-friendly budget. After reducing corporate taxes last year, we could see a Covid-19 surcharges being introduced," he said. READ MORE

Economic recovery: India's economy contracted by 7.5 per cent YoY in Q3FY21, following an historic 23.9 per cent YoY fall in Q2FY21. Since then, however, it has shown tentative signs of recovery. For instance, November's manufacturing PMI came in at 56.3 which was slightly lower than October's decade high value of 58.9 following the lifting of lockdown restrictions. Meanwhile, GST collection topped Rs 1 trillion for the second consecutive month indicating the broad level pickup in business activities.

According to the International Monetary Fund (IMF), the Indian economy is likely to contract by 10.3 per cent in the current fiscal (FY21) and thereafter grow by 8.8 per cent in fiscal 2021-2022. BNP Paribas expects India's GDP to contract 11.4 per cent in 2020, but grow at 11.6 per cent in 2021 and at 5 per cent in 2022.

Inflation and interest rate movements: According to Nomura, although retail inflation has peaked in India, it is unlikely to come down enough for the Reserve Bank of India (RBI) to make rate cuts in the whole of 2021. Over the medium term, there are chances of inflation heating up again and the RBI may have to switch to hiking rates as well in 2022, the Japanese brokerage said in a report.

After remaining elevated through 2020, Consumer price inflation (CPI) peaked in October at 7.6 per cent level, although the number cooled to 6.93 per cent in November. "Even as food inflation corrects, core inflation will remain sticky at 5 per cent in 2021, as rising commodity input cost pressures amid firming demand lead to a gradual return of firm pricing power," Nomura said.

Meanwhile, BNP Paribas sees CPI at 4.3 per cent in 2021 and 3.8 per cent in 2022. On its part, the RBI has indicated that inflation is likely to moderate in the second half of the current fiscal year but, at the same time, it has revised the target upward for upcoming quarters.

Global cues: The United States congressional leaders on Sunday reached agreement on a $900 billion package to provide the first new coronavirus aid in months. Congress aims to include the coronavirus aid package in a $1.4 trillion spending bill funding government programs through September 2021. The exact size of this aid package and the trend of recovery in the world's largest economy might set the tone for the rest of the world.

Apart from this, the markets will also keenly watch the negotiations between the UK and the European Union regarding Brexit while also tracking the US-China relations as well as any other significant geopolitical flashpoints that may weigh on the markets.