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Mutual Fund Review - January, 2021 - ICICI Direct

Posted On: 2021-01-27 09:06:34 (Time Zone: Arizona, USA)

Equity market outlook

- As we move to 2021, the resilient domestic set-up points towards a recovery in key macroeconomic data viz. GDP and infrastructure spending post a weak year. Corporate earnings, post the dip, are likely to see a handsome growth trajectory. However, after a "V-shaped" recovery and a flush of liquidity in the capital markets in CY20, the economic recovery path ahead is likely to be uneven. Furthermore, rising commodity price led inflation and new strain led risk of restrictions and lockdowns also persist. CY21, therefore, presents an opportunity where the basic tenet of asset allocation and sectoral/security selection will be tested and identification of micro themes across segments will hold the key

- The corporate earnings recovery is likely to be a major catalyst for the equity market performance, going forward. With the worst of asset quality concerns behind us amid resolution of big ticket stressed assets and economic optimism in the post-Covid era, Nifty earnings CAGR is impressively placed at 22.7% in FY21E-23E

- We expect midcaps and small caps to gain relatively more than the large caps in 2021. The earnings growth during a recovery phase will be high in midcaps and small caps along with valuation multiple expansion. Other macro factors like benign interest rates and structural cost rationalisation measures will also aid operating and financial leverage for this category. Accordingly, we believe midcap and small cap funds offer a better investment opportunity at current levels

- Volatility may increase, going forward, given the market has run up sharply since Covid-19 induced lows in March last year. The allocation strategy should be measured or buy on dips. Rebalancing of portfolio as per desired asset allocation is also important in the current environment

Debt market outlook

- The Union Budget is likely to be an important event being watched by the bond market. Fiscal deficit for the current year is likely to be much higher at 7% given muted tax collection, low disinvestments and higher spend towards food & cash distribution programme initiated by government during the pandemic. Given the need for higher infra spend to shore-up the economy, we build in 5% fiscal deficit for FY22E as well. This may put pressure on yields with higher G-Sec supply

- RBI recently indicated at moving towards normalising the current excess liquidity. The same, however, may not materially impact the yields curve, except at very short-term, which was trading at abnormally low levels

- Banking system liquidity is likely to remain in surplus over the next few quarters. Long term yields, however, may remain under pressure given already low levels and higher supply for the next financial year. The resumption of foreign inflows will be key in supporting the longer tenure yields along with RBI purchases

- The yield for quality bond portfolios like corporate bond funds is trading at cyclical lows. Therefore, the return expectation should be lowered. Selective funds in the medium term category offering higher yield with measured exposure to sub-AAA rated papers are better placed for long term debt allocation. However, it is better to avoid lumpsum allocation and adopt a more staggered approach over the next few months

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Source: Equity Bulls

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