December 2020 Stock Market Outlook

Indian stock market outlook as of December 2020 has got to do with low-interest rates globally and optimism around vaccines. These things have led to new highs for Nifty. The stock market outlook seems constructive given that incremental data suggests an improvement in economic activity and better utilization.

Review

For the year ending Dec’2020, Nifty closed at 13,981, around 15% higher over last year. In the last 3 years, Nifty is up 33% translating into ~9.9% CAGR.

Low-interest rates globally and optimism around vaccines have led to new highs for Nifty. The timeline for Vaccine approval and distribution remains uncertain for now. The recent rally is led by cyclical stocks which were beaten down due to uncertainty about economic recovery. Incremental macro data suggests an improvement in economic activity and better utilization. Unabated FII inflows into the emerging markets are leading to new highs for Nifty. We have written a note on What are FIIs seeing.

Stocks that benefitted from the Covid crisis may cool off but individual stocks that report good results will continue to perform well in lines with earnings.

After record inflows of Rs. 65,238 Cr in Nov’20, FII bought aggressively even in December 2020, with net inflow to the tune of Rs. 45,000 Cr. Like we shared in our internal blog, FII buying or selling doesn’t provide any hint on future market direction.

GDP contracted by 7.5% in the second quarter of the calendar year 2020. For this financial year, the contraction is around 15%. With an expected recovery in key parameters like e waybills, auto sales, cement offtake, IIP, and GST collections, it appears the next half will see good GDP recovery closer to pre-covid levels.

Outlook

As of date, the average upside of our coverage universe is likely to be less than 10% CAGR over the next 3 years basis based on current estimates. The Valuation of companies goes up every quarter if the company reports growth in earnings. This can improve the upside potential of stocks. If we see growth improving next year, we may see an upward revision in our estimates.

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