Top domestic brokerages who took part in the ETMarkets New Year Survey said it would require the market to get over a number of concerns in order to be able to deliver on those bullish projections for Calendar 2021.
They include a surge in commodity prices and a resultant inflation, possible rollback of stimulus measures by global central banks, a slower-than-expected recovery in businesses, stickiness in non-performing assets (NPAs) at banks and rising returns in other asset classes, such as cryptocurrency and real estate among others.
Analysts at a dozen brokerages largely agreed that rising inflation would pose a key risk to any further upside for the market.
G Chokkalingam, Founder at Equinomics Research and Advisory, said it is possible that the inflation rate would shoot up due to excessive liquidity in the global economy and a spike in commodity prices.
“Our market does not have adequate depth in terms of liquidity,” Chokkalingam said.
If FPIs sell even 0.5 per cent of the total market-cap due to inflation concerns, it would mean over $12 billion outflows.
“When FIIs sold just $8 billion worth of equities last March, the market fell 38 per cent. Thus, a possible spike in inflation and the resultant selloff by FIIs, tapering of stimulus measures by central bank and withdrawal of new retail investors at the first sign of correction in stocks could be major risks in 2021,” he said.
Nirali Shah of Samco Securities said rising inflation, if it remains unchecked, could pose a big risk. “It can rise due to a spike in Brent crude prices,” he said.
Another risk to stocks could come from the impact of loan moratorium on bank books.
Rusmik Oza of Kotak Securities said the economy is bracing for financial sector stress, emanating due to the slowdown and moratorium-related bad loans.
“Any sharp rise in global bond yields could lead to a reversal of flows from emerging markets, thereby impacting equity markets. This year’s rally in global equities has been fuelled by big technology stocks in the US. Multiple law suits have been filed against some of the Big Tech companies in the US and Europe. Any negative outcome on this front can lead to a correction in those stocks, leading to a correction in global equities,” he said.
Another factor weighing on the market would be higher stock valuations. The index is trading at a forward P/E of 20.5 times against the long-term average of 16-17 times, said Vinit Bolinjkar, Head of Research at Ventura Securities.
“A significant surge in commodity prices could increase input cost of Nifty companies and impact their earnings potential,” he said.
Naveen Kulkarni, Chief Investment Officer of Axis Securities, counted NPA challenges, sustenance of the economic recovery and inflation as three major challenges for equities. “If inflation comes back globally, interest rates will start moving up and that will have a major impact on liquidity,” he said.
Gaurav Garg, Head of Research at CapitalVia Global Research, said the inflation rate has been hovering above RBI’s comfort zone. “How RBI deals with this situation has to be seen. And this could pose a potential risk to the Indian economy. Less-than-expected quarterly earnings, corporate debt defaults and escalated geopolitical tensions can be other risks that can put the brakes on the stocks rally.
“On the other hand, continued FII flows, solid demand and economic recovery and improvement in macro-economic data can add further strength to the market and boost investor sentiments,” he said.