Aditya Birla Sun Life MF expects Nifty to grow 10-12% over 3 years

The country’s fourth largest fund house, Aditya Birla Sun Life MF, expects a compound annual growth rate (CAGR) of 10-12 per cent for the Nifty, over the next three years.

Positive news on the vaccine front, faster-than-expected economic recovery, continuing fiscal and monetary policy support, and high liquidity are likely to provide a supportive backdrop for stocks, Aditya Birla Sun Life MF said in its 2021 outlook report, released on Thursday.

A weak dollar and strong commodity prices augur well for emerging markets (EMs). This is because global investors are sitting on $350 billion worth of dry powder and EMs are currently under-owned with EM assets under management (AUM) 7.3 per cent of global AUM (versus a historical average of nine per cent).

“Even if India receives 10 per cent of the $350 billion in dry powder, it would mean inflows of $35 billion over the next few years,” the fund house observed.

Although markets seem fairly priced, the fund house believes that upgrades to economic growth and earnings estimates, as well as an environment of low interest rates and high liquidity, will drive markets higher. Further, valuation multiples are expected to remain elevated against long-term averages, given the high liquidity.

The fund house says it is best to take a three-year view on equities in the current environment, as the economy and earnings will normalise by then.

Aditya Birla Sun Life MF said the recession triggered by the Covid-19 pandemic is more V-shaped than previous post-war cycles, which were driven by financial shocks to asset markets and income.

“India has higher bounce-back potential from a vaccine as India’s GDP growth has declined more than any other country and it has the best structural growth prospects due to reforms and productivity gains due to digitisation,” it said.

Like most brokerages and analysts, the fund house expects mid- and small-caps to outperform large-caps. Improving market breadth will also provide opportunities for active funds to generate alpha, it said. “Investors should stay invested, continue their SIPs, and buy into any dip as any correction is expected to be temporary and minor (5-10 per cent). Lump-sum investments can be spread out over next few months.”

Domestic cyclicals and financials are themes that could play out in 2021. Demonetisation, the goods and services tax and now the pandemic have triggered a second wave of consolidation in favour of organised players, which is why good listed companies have come out with flying colours, it said.

Aditya Birla Sun Life MF said initiatives like the production-linked incentive (PLI) scheme should help attract foreign direct investment (FDI) and revive manufacturing capex, while exports/industry should recover with rising global trade. Banking sector non-performing assets (NPAs) should be manageable, while a recovery in the housing sector could support economic recovery. Consumption growth should normalise, too, as employment and income growth recover, it said.