Risk Calibration: How equity markets, gold, currency are likely to perform in 2021

The year 2020 has been a very volatile year for the Indian as well as global indices. The market sank to new lows soon after the COVID-19 pandemic started. However, it later found new highs near the year-end on vaccine progress and US presidential election results.

The benchmark indices lost around 40 percent from the peak in January to sink to a four-year low in March as the coronavirus outbreak hit a peak. After hitting the year's lowest point on March 24, the market picked up momentum and has surged 80 percent till date. The recovery was on the back of signs of economic growth and earnings revival.

Will this momentum continue in 2021 or the markets will witness some consolidation? A recent Axis Securities report forecasts how various asset classes—Equity markets, gold, fixed income, the currency will perform in the following year.

The brokerage expects benchmark Nifty50 to hit 14,600 by next year-end. Growth combined with value is a win-win proposition even as the Indian equity markets have reached an interesting point the market offers multiple plays, noted the report.

It prefers value plays like metals, banks, NBFCs and others that have started delivering solid returns. With an improved outlook and with a focus on growth, risk rewards are in favor of the BFSI space, it noted, adding that it believes outperformance of BFSI will continue in upcoming quarters also.

It also likes small and midcap space marked by discretionary consumption, retail, and autos which have delivered returns.

"Small and midcap stocks are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline. We believe volatility will decline significantly in 2021 which will lead to a small and mid-cap rally," stated the report.

Thus, the market is rewarding handsomely across both themes. Hence, the combination of the two themes continues to deliver the most rewarding returns, suggested Axis Securities.

As per the brokerage, gold suddenly lost its momentum due to ‘Risk on’ trade in the global market amid positive development on the vaccine front.

"Overall investor’s sentiments have improved in the last few days. Now the investors are betting higher on riskier assets like equity, these improved sentiments further stoked by optimism on the vaccine development after the upbeat results shown by US drug manufacturers Pfizer and Moderna. All these developments are keeping the gold prices under pressure. The improvement in the global economy and the likelihood of more predictable trade policies will further keep the gold prices range-bound," forecasts the brokerage.

Earlier in the year, Gold emerged as a promising asset class during the volatile times. The yellow metal gathered traction and gold investment outperformed all the major asset classes. On YTD basis, Gold has risen 23 percent in rupee terms and 18 percent in dollar terms.

However, the brokerage noted that gold prices recently corrected sharply on account of the equity market hitting an all-time high, more risk appetite towards the emerging market and positive development on the vaccine.

Moreover, gold prices are inversely correlated with bond yields. Currently, US bond yields are in a downward trajectory and likely to remain softer on account of slower economic growth in 2020. Hence, it maintains a 'neutral stance towards the commodity and advises investors to remain invested in gold.

The Indian currency has performed well in 2020 to date and has been stable versus the other emerging market currencies of Brazil, Russia and South Africa on account of higher foreign exchange reserve and stable outlook stated the brokerage.

The currency market has been further supported by faster than expected sequential recovery in high-frequency indicators, suggesting a strong pick-up in economic growth, it added.

On a YTD basis, all the major developed market currencies appreciated against the dollar, Euro has appreciated against the dollar by 7 percent. The brokerage predicts that in the longer run dollar may lose strength on account of lower interest rates which is likely to be softer for a long period of time.

The slope of the yield curve has been the steepest in recent years. The difference between shorter and longer (3 months, 10 years) bond yield is 300 bps which was 130 bps during pre-Covid times.

The brokerage believes the yield curve will remain steep given the

ample liquidity in the system towards the lower end of the yield curve while the longer end will remain elevated due to the higher supply of G-sec and remain cautious due to fiscal deficit and inflation risk over a medium-term. It continues to favor a quality approach in bonds with some non-AAA exposure based on individual risk appetite.