Bombay Stock Exchange in Mumbai (BSE)
India’s stock market rally is set to continue and hit new record highs in 2021, according to a Reuters poll of equity strategists. Image Credit: Bloomberg

Bengaluru: India’s stock market rally is set to continue and hit new record highs in 2021, according to a Reuters poll of equity strategists who overwhelmingly expected corporate earnings to return roughly to pre-pandemic levels within a year.

The November 12-24 Reuters poll of over 35 equity strategists predicted the BSE Sensex index, which is currently trading at a record high, would set new all-time peaks in the next year. It was forecast to rise about 3 per cent from Tuesday’s high to 45,750 by mid-2021.

It was then predicted to rise another 4 per cent to 47,550 by the end of 2021, with forecasts ranging from 36,000 to 54,400.

Those forecasts were based on recent progress in developing COVID-19 vaccines even as cases rise around the world, according to over three-quarters of strategists, or 26 of 34, who answered an additional question.

Global stock markets have rallied since a sharp sell-off in March, ignoring deep recessions in most economies and driven largely by billions of dollars of fiscal and monetary stimulus and hopes for a swift economic recovery.

Emerging market assets have also gained on the weakness in the dollar, which hit a three-month low against a basket of currencies on Monday. The Sensex has repeatedly hit record highs this month, surging more than 10 per cent on hopes for an economic revival on coronavirus vaccine progress.

Rising risk appetite

“Looking ahead, continued improvements in global risk appetite will further boost Indian equities, despite the weakness of the economy,” said Shilan Shah, senior India economist at Capital Economics.

From a low of 25,638.9 on March 24 at the start of the pandemic, the Sensex has rallied over 70 per cent to a record high of 44,601.6 on Tuesday, marking about an 8 per cent gain for the year.

That was despite Asia’s third-largest economy shrinking nearly a quarter in April-June, much worse than forecast and pointing to a longer road to recovery.

India - the world’s fastest-growing major economy until a few years ago - now looks to be headed for its first full-year contraction this fiscal year since 1979, according to a separate Reuters poll which predicted gross domestic product would take over a year at least to reach pre-COVID-19 levels.

But asked in the latest poll when corporate earnings would return to pre-COVID-19 levels, 28 of 32 strategists said within a year, including 10 who said within the next six months.

“We remain in a bull market that started in March, and even though one should expect corrections along the way, the equity market may have more legs before it tops out,” said Ridham Desai, equity strategist at Morgan Stanley.

“We raise EPS estimates and (the) index target. As revenues slowed during COVID-19, companies were quick to cut costs to protect margins and profits relative to expectations. We are now seeing an improvement in earnings estimate revisions breadth and earnings estimates.”