2021 – enter the post-pandemic world?

19 November 2020

7 minute read

By Narayan Shroff, India, Director, Investments

After a tumultuous year and with the pandemic clouding prospects for next year, how best might investors with Indian assets position portfolios for a low-return, post-pandemic world?

This has been an unusual year. Apart from the pandemic, lockdowns and speculation around the virus’ source and hopes for a vaccine, financial markets have had much more to keep them busy. Preventive measures taken in India were stringent to say the least, but for a country of its size, population density and complexity, it seems to be faring relatively well so far.

Next year a potential vaccine will hopefully be nearer. But even without one, the world seems to be learning to live with COVID-19. Other geopolitical events known at the start of this year, such as the US presidential election, Brexit trade negotiations or trade wars, may also pass (at least from financial markets’ barometer) as we move into next year.

Changed world

Usual service may also be restored in moving from a period of extremely low data visibility to one with more high frequency data, such as Google mobility, to help return to the usual frequency and quality of economic and corporate data prints.

While a successful vaccine announcement may be positive for the economy, in the interim markets may catch a taper tantrum. We believe that any such reaction may be short- lived, since neither vaccine deployment, a V-shaped revival or a sustainable pick up in inflation above the central bank’s comfort zone seem feasible next year.

A lower for longer interest rates regime, along with turbo- charged liquidity support and several other tools, such as on-tap open market operations in central and state government bonds, targeted long-term repo operation and the like, remain the state of play for the markets. In fact, risk-free rates have rarely been this low for so long in India. This suggests lower yield and return expectations in 2021 across asset classes.

Optimism to return?

The transition from a period of panic, apprehension and return to a calmer attitude seems largely already complete for many investors this year. Next year could see a move to “cautious optimism”, perhaps with more acceptance across equities, select lower credits and less liquid investments such as private markets, driven by a ”there is no alternative” (TINA) approach, better visibility, reduction in cash reserves and much hope.

The room for meaningful fiscal support remains muted and so does the efficacy of the Reserve Bank of India’s (RBI) monetary policy in reviving economic growth. The key to India’s economic revival remains a sustained increase in consumer spending and credit, aided by better sentiment. Employment, job security and growth look critical for this to happen.

Rural India has taken the lead this year, aided by the flurry of reforms and targeted fiscal support. Next year should see a broadening of this recovery across semi-urban and urban centres as well. Also, while credit growth should be aided by better availability of credit and lower rates (affordability), consumer and business confidence remains the key fulcrum here as well.

Inflation and credit risks

Inflation is a key indicator to watch out for. Reflation may help risk assets and some rotational trades in the first half of 2021 and the central bank might look through the same. However, a sustained hike in demand-led inflation, although not our base case, could mark the beginning of a pause or even reversal in central bank monetary policy.

Another key risk plaguing the Indian economy since 2018 is credit risk. Debt moratoriums, forbearances, credit enhancements, extensions of terms, relaxed compliance regimes, respite on recognition norms for stressed assets and abeyance on credit rating downgrades or bankruptcy proceedings were among factors that were critical in mothballing the economy.

But, such initiatives allay fears while increasing concerns around more cans being “kicked down the road”. While investors seem to be running light on credit exposures, any economic shocks, or accidents, may jeopardise a revival in risk sentiment.


As ever, portfolio diversification is key. Geopolitical risks, including trade wars, terrorist activities or escalated border tensions (as with China) remain on the horizon. On the economic front, a “China+1”strategy should continue to aid business flows to India.

Our investment strategy remains similar to this year for the next. Diversified Indian multi-asset portfolios, also adequately allocated to global equities and gold, averaging-in investments, with a preference for high-quality companies, and active management appears an attractive approach. While gold has been traditionally held by Indian households, Indian investors seem to be increasingly realising the attractions of investing in global equities. This trend is likely to pick up pace next year.

We remain constructive on oil prices for next year. However, this hinges on containment of the spike in COVID-19 infection levels being seen in many developed economies, especially in the US.

The Great Polarisation

Our “The Great Polarisation” theme, favouring quality, resilience, safety and liquidity attributes, introduced last year should continue into 2021. That said, the theme  may be slowly diluted with the baskets expanding across both equity and debt names. Bottom-up selection is likely to remain key as broader market or index returns may be muted.

Unorthodox tools could become mainstream under the current RBI governor and such continued financial repression by the central bank across the rates and credit curves may induce unpredictability. With the steepness in yield curves, as well as attractive credit spreads, a carry plus roll downs strategy with a portfolio diversified across the curve could do well as a core debt portfolio strategy. Also, with more visibility in the market, tactical trades should start appearing more often.

More volatility

Indian equities are likely to remain volatile as valuations and earnings’ expectations suggest little room for error. However, India has been a net recipient of foreign flows over recent months and this trend is likely to continue in public and private markets, due to its strengths relative to emerging markets more generally.

We prefer quality, sustainable businesses, across market capitalisations, with earnings growth momentum. Such businesses include well-capitalised private sector banks and non-banks, other financials, consumer-facing businesses, technology, pharma and cement producers, which seem well placed to capture growth from the economic rebound. “Cheap value” (such as low price-earnings companies with sinusoidal earnings) will probably do well in a recovery scenario but it may be difficult to time and is unlikely to last long.

Private assets can provide portfolio diversification benefits along with access to many investment themes and opportunities post-pandemic. Some sectors expected to prosper next year and beyond from such themes include pharmaceuticals and healthcare, technology, consumption, chemicals, food processing, supply chain and logistics, asset leasing and structured private debt. Also, the nascent real estate investment trust (REIT) and infrastructure investment trust (InvIT) markets in India should continue to perform well.


Outlook 2021

Barclays Private Bank investment experts highlight our key investment themes and strategies for the coming twelve months.


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