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Despite the unprecedented impact of the Covid-19 pandemic on Indian and global economics, 2020 ended on a happy note for investors; hope from 2021 are very high. The market rally is fuelled by a strong economic recovery, supportive monetary policy and easing of active Covid cases despite increasing mobility. Above all, the easy and ample liquidity globally is finding its way into risky assets including emerging market equities. The availability of Covid-19 vaccine has made things even better.

The macro set-up also remains favourable led by hopes of a robust recovery in both the Indian and global economies. Still, interest rates are likely to stay low and monetary stance accommodative across major regions and countries. Also, extended Covid-led lockdowns remain a key near-term risk. Valuations remain expensive on a P/E basis, largely due to a steep compression in earnings amid Covid; though it is still reasonable on other parameters such as price/book value (PBV) or market-cap/GDP. Markets would also derive support from a weak US Dollar, rising FII inflows and upgrades in consensus earnings estimates.

Overall, investors should bear the big picture in mind with the economy set to touch the $5 trillion mark (perhaps by 2026-2027) and this will again offer investors loads of opportunities to make good returns on their investment.

Debt / Fixed Income Market:

System liquidity rose to Rs 5.6 lk cr as on December 29, 2020 as compared to the previous monthÂ’s average liquidity of Rs 5.31 lk cr. In such uncertain times, investors should prioritise safety and liquidity and stay invested in schemes at the short end of the yield. However, it would be advisable to have some tactical exposure to arbitrage funds, accrual strategies and dynamic funds.

Debt Market Outlook:

Bottoming out of interest rate cycle; liquidity measures to gain importance

There was a little scope for policy rate cuts by RBI, but the commentary indicates the central bankÂ’s intentions to keep rates range bound and monetary stance accommodative. With possible firming up of inflationary trends and the economic recovery, RBI is likely to focus on liquidity measures and could gradually withdraw some of the excess liquidity in 2021. However, the banking systemÂ’s liquidity is expected to remain in surplus aided by sustained growth in bank deposits as against the bank credit offtake. Consequently, it could be a difficult year for fixed income investors with likely volatility in bond yields based on inflationary trends and RBI action on liquidity measures.

Strategy:

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Short end of the yield curve still safer; tactical allocation to arbitrage funds and dynamic funds Inflation uncertainty will keep yields volatile. In the current scenario the investor should prioritise safety and liquidity and consequently, stay invested at the short end of the yield curve. However, it would be advisable to have some tactical exposure to arbitrage funds, accrual strategies and dynamic funds.