Beaten, But Not Out!
The Sensex touching 50,000 is something that most investors thought would never happen in 2021, given the fact that the world has been gripped in the claws of the pandemic. Now that this has really happened, and promises to show good momentum in 2021 on the back of economic recovery and strong earnings, investors are busy identifying which set of stocks may outperform the Sensex and trying to discover hidden treasures. The DSIJ team thinks that investors may not be disappointed if they search for opportunities in the beaten down stocks of 2020. The article explains why
Experts are divided over where the markets can go from here with many of the firm belief that the markets are overstretched and a correction is eminent while there are some who believe that the market will make new highs in 2021 and easily surpass the recent highs of more than 50,000 made by the Sensex on an intraday basis. In the recent correction when the Sensex fell by more than 800 points from the day’s top in a single trading session, it was observed that the automotive and IT sectors’ stocks gained significantly. Such sectoral rotation has been the hallmark of the market over the past few months.
The market is interestingly rotating between various sectors and ensuring wider participation from the broader markets. While the trend is unclear for the short-term period, the long-term market structure looks promising and the stock prices could be higher one year from now for most of the scrips. What an investor cannot miss is the fact that the Asian markets have started the year on an extremely bullish note whilst outperforming the US’ markets. China has been a worldbeating market in 2021 so far, followed by Korea and Japan. The Sensex is up by 3 per cent on YTD basis and is performing in line with the US markets.
If we listen to what the experts who track the US’ markets are saying – there is a consensus being built around the fact that the US’ markets may underperform its global peers in 2021. It is widely expected that the developed world markets may outperform US’ equities while the outlook for the emerging markets is extremely bullish. One of the reasons for the bullish outlook on emerging markets is the pro-international trade stance that the US Democrats are expected to take with President Joe Biden in charge.
The Asian countries could be the biggest beneficiaries of the change in political leadership in the US. The stock prices may simply reflect the optimism present in global trade in 2021. This year could well be a story of American investors chasing growth and parking money in the emerging markets with earnings’ growth visibility. Says Aaadit Gandhe, a seasoned investor: “Many are labelling the current equity market rally as a liquidity driven rally. However, the way I see it, I think it is an earnings’ growth-driven rally supported by liquidity. If it was purely liquidity pushing the stock prices without the support of the earnings, it would have been a tricky situation for investors like me.”
“The earnings’ growth is there and seen across sectors. I am sure the FPIs are pouring in money looking at the growth potential of the Indian markets. The overall outlook is bullish no doubt. The main question is where to invest in such a market condition where we are close to record highs. Should I invest in the similar themes that worked in 2020 or should I speculate on new theme for 2021? Should I bet on momentum stocks or should I bet on the laggards of 2020? I am not very clear as to what strategy may work in 2021,” he adds.
Laggards of 2020
The start for equity markets could not have been better with markets making record highs world over. It looks like the FPIs are so far continuing to invest in emerging growth markets like India and the momentum stocks are gaining ground even as we speak. It is interesting to note that none of the stocks that have gained more than 25 per cent in 2020 are showing negative returns in 2021. That means the winners of 2020 are winning in 2021 as well. How long will this continue is anybody’s guess! However, this phenomenon may continue till the time FPIs continue to pump in incremental money into the markets.
There is another pack of stocks that looks very interesting from an investment point of view. Beaten-down stocks, or stocks that did not do well in 2020, look to be promising for those investors who understand value in stocks.
The Asian countries could be the biggest beneficiaries of the change in political leadership in the US. The stock prices may simply reflect the optimism present in global trade in 2021. This year could well be a story of American investors chasing growth and parking money in the emerging markets with earnings’ growth visibility.
Conclusion
For the risk rally to continue it is essential that the USD remains weak and the vaccine rollout is smooth in both the US and other developed countries. An aggressive stimulus package in the developed world is also essential for the markets to build on the gains made in 2020. While a lot will depend on the progress made in vaccine rollout and an aggressive stimulus package, investors seem not to be worried about the market outlook as of now. There is no panic even though the fear of the market falling from its all-time is high is quite visible. That said, such fear of a downfall after reaching a peak is part of the game. The market is a forward-looking phenomenon that discounts events six months in advance.
One of the biggest arguments made by pessimists is the fear of FPIs pulling out of Indian markets and the impact such an action would have on the stock prices in India. A withdrawal of Rs 60,000+ crore from Indian markets when the pandemic hit us in 2020 pushed the Sensex down from about the level of 40,000 to 25,000. It is another issue that the FPIs once again flocked to the Indian markets. However, there is always the risk of FPIs either stopping fresh investments or withdrawing their investments in the near future.
The right question to ask for investors is why would FPIs withdraw money from the Indian markets? This may happen if and when the interest rates start increasing in the US or even when there is a hint by the US Federal that it may increase the interest rates in the US’ markets. That probability of rate increase in 2021 is close to zero in the developed world as majority of central banks from developed markets have already committed to near zero interest rate for a long time to come and certainly the rates may not inch upwards in CY 2021. In all likelihood, the FPI money flow is expected to continue in India. With liquidity hitting the markets, the stock prices may remain inflated and there is always a risk that even poor quality stocks will gain in prices.
With asset prices soaring, it creates a mirage that things are improving on the ground and with that perception the risk of the government slowing its reform process remains omnipresent. And that is why excess liquidity may not always be good even for a capital-starved nation such as India. The year 2021 could well be the year where we may have enough liquidity to keep equity prices pumped up. However, we may not attract excess liquidity to push stocks prices into the bubble zone. With excess liquidity the money may find itself headed into momentum stocks and hence these may continue to do well till the time the FPIs keep pumping incremental cash.
As and when the money flow gets more balanced and less ferocious, the balance may shift from momentum stocks to value stocks and that is where the beaten-down stocks or underperformers of 2020 may start outperforming. Investors can start hunting for long-term investing opportunities in the beaten-down stocks of 2020 that may do well in 2021. One of the reasons why this strategy may work is because valuation will be an advantage with the beaten-down stocks. Obviously, not all beaten-down stocks can be ripe for investments, but carefully scrutinised opportunities could prove to be extremely profitable.