By: Nikhil Kamath
As the rollercoaster of a year – 2020 – comes to an end, we see ourselves at the peak of a bull market which nobody could have seen coming especially during the March lows. This sheer unpredictability of the capital markets makes it difficult for one to predict what lies ahead but subtle cues for sectors/themes that are poised to excel are there to be seen.
Coming into 2020, rational investors believed that the markets were overvalued and unlike the previous market crashes i.e GFC and dot com bubble burst which are examples of market failures, the 2020 crash was caused due to a global pandemic which very simply put, paused the global economic engine.
Once the effects of the pandemic were normalised, businesses with greater capital reserves have been able to return to normalcy a lot faster than others but everyone barring a few sectors are on the path to recovery. Some sectors like aviation, hospitality continue to see pain through no fault of their own but sectors like real estate, agriculture which were otherwise dormant segments of the economy are showing signs of resurrection. This structural shift in the economic engine will give investors new avenues to invest.
Looking ahead, low-interest rates which propagate liquidity and high inflation will continue to force money into capital markets. FII inflows, which hit an all-time high in November, will continue to pour into the markets due to the weakness in the dollar as seen in the dollar-cost index.
At the ground level, consumer-facing sectors, especially discretionary goods and services will continue to be subdued as consumers focus on shoring up their disposable income due to the uncertainty around the short-term effect of COVID and the vaccine. Policymakers have focused on providing funding to targeted sectors which have the ability to spur demand for goods and employment across multiple sectors.
I think the coming year will be less volatile than the last. The pandemic brought with it incredible amounts of uncertainty around which sectors will live through the economic downturn. Markets often overestimate a problem, to begin with, and course-correct with a vengeance.
I believe the Indian Economy possesses immense amounts of growth potential and at the current juncture, finding value in sectors/companies is what one must focus on. It will be prudent at this juncture to focus on inherent fundamentals and ignore most of the noise.
(Nikhil Kamath is the Co-founder and CIO, True Beacon and Zerodha. The views expressed by the author are his own. Please consult your investment advisor before investing.)