Despite a grim turn of events at the start of the year, Indian shares have given positive returns overall recovering from the March lows on the back of continuous FIIs inflows, better-than-expected earnings momentum and progress on the COVID-19 vaccine front.

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Axis Capital believes that the liquidity-driven bull market of 2020 is now headed towards the bubble phase in 2021. While corrections are inevitable, the brokerage sees Nifty scaling new highs of over the 16,000-mark in 2020.

Among individual stocks, Axis Capital's top overweights and must-own ACE Ideas to play the 2021 inflection are Bharti Airtel, Dr Reddy‘s Labs, Godrej Consumer, ICICI, Larsen & Toubro, Mahindra & Mahindra, State Bank of India, SBI Life, UltraTech Cement.

As per the brokerage, the rally is likely to be driven mainly by these enabling factors:

Liquidity tap would continue to flow: As per Axis Capital, COVID will keep demand recovery uncertain and uneven which would drive central banks to remain tolerant to data surprises on both growth and inflation. Global capital would continue to chase growth which is an advantage for EMs, especially India—after all, FII participation is key for markets to remain buoyant, it noted.

Improving macro: India is already seeing macro recovery despite being hit hard by the pandemic (currently only 10-15 percent of the economy under stress). High-frequency indicators—strong rural growth, pick up in exports, improving PMI’s, buoyancy in GST and tax collections, green shoots in CAPEX cycle—point to strong macro recovery ahead, said Axis.

Earnings cycle improving: While the last decade saw consistent earnings cut from the sell-side, stocks are now seeing upgrades. With the Covid-19 pandemic, Street lacked clarity on the economic impact on businesses and completely wrote off corporate earnings, however, business normalisation in H1FY21 has been ahead of expectations, noted the brokerage. This has been driven by lower than expected revenue decline and cost efficiencies which have led to marginal EBIDTA decline in H1, it added.

However, it cautioned that abundant Liquidity, earnings recovery, improving macro both globally/locally, and relative valuation comfort could lead markets to the bubble zone.

(Edited by : Ajay Vaishnav)

First Published:Jan 14, 2021 1:22 PM IST