Equity markets have hurtled past their January 2020 peak but offer limited upside from hereon
"What defines us is how well we rise after falling," American author and motivational speaker Zig Ziglar had said famously. The Indian equity market seems to be re-establishing this with a remarkable upsurge from its March 2020 bottom. Benchmark indices have already tramped past their last January peak by around 19 per cent. But, after this extreme roller-coaster ride, markets have now turned cautious due to profit-booking globally. The Sensex is down 7.3 per cent from its all-time high and continues to remain volatile.
After the yo-yo, there is a limited upside now. It would be realistic to expect modest returns from the current levels, according to V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services. "Around 53,800 on the Sensex and 15,800 on the Nifty would be realistic targets. If there are clear indications of a sustained economic growth and corporate earnings recovery, it is possible that FPI inflows may accelerate. This can't be ruled out; 11 per cent GDP growth and 25-30 per cent earnings growth are achievable in FY22. But since valuations are high, market would be excessively volatile," he cautions.
A Turbulent Ride
The coronavirus outbreak ensured strict lockdown measures, which turned out to be the Black Swan event that disrupted markets -headline indices saw their worst single-day crash, the Sensex plunged 3,935 points, while the Nifty fell 1,135 points, on March 23. The outlook appeared extremely pessimistic, but progressively turned into one of the most incredible journeys so far.
Soon after tumbling a little over 38 per cent off its cliff, the Nifty was up 22 per cent in a month, and had reclaimed 38 per cent in three months. On January 21, the index raced past its peak to touch a fresh all-time high, recouping almost 94 per cent of the losses since the crash of Spring 2020 - undoubtably the best in financial history. At different time periods when markets had fallen over 25 per cent from its peak, it snapped out of it typically in three-six months, barring the Tech meltdown of 2000. "The Nifty has seen a recovery of around 100 per cent from its March low of 7,511 to its recent lifetime high of 14,753 in just 10 months. The Sensex has also hit the 50,000 mark," says Chandan Taparia, Derivative and Technical Analyst, Motilal Oswal Financial Services.
Highlighting the key drivers of this relentless rally, Devang Mehta, Head, Equity Advisory, Centrum Wealth Management, says, "Markets have surprised investors with the intensity and extent of the rise. However, apart from liquidity, which has been responsible for the huge rally across asset classes, part of it is also attributed to improving macros, visibility of earnings growth for India Inc. as well as a solution for Covid-19 in the form of vaccine. This has led to demand coming back across sectors."
So, despite a difficult year, the index gained 15 per cent in 2020, compared to a 12 per cent gain in 2019.
Size Doesn't Matter
This rising market tide has lifted all stocks, thanks to better participation across categories. While largecaps performed better compared to the past two years, midcaps and smallcaps were the clear winners.
Smallcaps on the fast lane: The Nifty Smallcap 250 index zoomed past the 50-share index by recovering 110 per cent, with nearly 40 per cent stocks surpassing their benchmark returns. Besides, 16 per cent of this lot touched their all-time highs in December and January. The segment finished 2020 on a high note with a 24.2 per cent gain, but was the worst performer in 2019 and 2018 with -8.6 per cent and -27.2 per cent returns, respectively. "The recent spate of initial public offerings (IPOs) and their success clearly indicate the appetite for mid-and small-cap stocks," according to a recent report by Axis Securities.
Midcaps come along: Earnings revival and the Securities and Exchange Board of India's (Sebi's) new portfolio norms for multicap schemes have given this segment a shot in the arm. The Midcaps 150 index trounced its larger counterparts by gaining 98 per cent, with 29 per cent constituents touching their all-time highs in the last two months. The index posted robust returns of 24 per cent after declining 0.3 per cent and 13.2 per cent, respectively, over the past two years. "We believe volatility will decline significantly in 2021, which will lead to a small and mid-cap rally," the report added. Around 98 per cent stocks listed on the bourses delivered positive returns, and close to 61 per cent outstripped the performance of leading indices in the last 10 months.
Impressive Sectoral Show
Most of the sectoral indices rallied during this timeframe, but IT, metal and auto rose 100 per cent.
IT, The Leading Performer: Stocks of Info Edge and L&T Infotech were in the vanguard with over 200 per cent jump since March, helping the sector post a 137 per cent rise. The sector significantly outperformed the broader markets with 54.2 per cent growth after narrow returns of 8.3 per cent in 2019, primarily on digitisation and increased IT spending. "Going into 2021, we expect the earnings acceleration to continue on the back of increased IT demand visibility. The first half (H1) of 2021 is expected to deliver healthy sequential revenue growth with stable margins, supported by a ramp-up of large deals by companies," an IIFL Securities report released in January had said.
Auto driving, metals shining: Both these sectors posted double-digit growth after a challenging 2019 (where they fell by 10 per cent). A recovery of over 120 per cent was led by stocks of Tata Motors, Ashok Leyland, APL Apollo Tubes and Jindal Steel & Power, in their respective segments, with more than 3x growth in their share prices. "The metals and mining sector has been one of best contrarian sectors of 2020. As lockdown posed challenges to commodity prices with crude contracts dipping into negative territory during the April contract closing, metal stocks ended the year with strong returns as demand scenario improved and metal prices surged," according to the Axis Securities report.
The automobile sector witnessed pent-up demand and need for private transportation surged during the year. "The upcoming budget could provide benefits for domestic manufacturing and auto & auto ancillary stocks are likely to see the benefits," the report added.
Pharma, The Biggest Outperformer Of 2020: The sector gained over 80 per cent of the lost ground and emerged as the biggest outperformer of 2020. The outlook remains resilient this year with potential earnings upgrades for companies engaged in developing or contract manufacturing capacities of Covid vaccines. Taparia of Motilal Oswal expects positive momentum to continue in IT, auto, insurance and selective consumption-related stocks in the next coming days with their outperformance behaviour.
Banking on banks: The index was up nearly 90 per cent, though returns declined by 2.6 per cent during 2020, against a 17.4 per cent growth in 2019. It is expected to do well this year. "In 2021, the banking sector holds the key for the performance of equity markets as it is flushed with liquidity and focus on growth is coming back. If credit growth picks up, markets will continue to do well," the Axis report said.
Realty check: Recouping almost 89 per cent of their losses, the sector posted narrow gains of 5.4 per cent last year, against a 25.7 per cent return in 2019 and a 33.2 per cent decline in 2018. Commercial real estate is expected to remain steady throughout FY22, and earnings upside could be driven by faster-than-expected ramp-up in new leasing, which remains muted as of now, due to work from home for MNCs and restrictions on international travel, noted the IIFL report.
The FMCG show: The sector settled at the bottom with 49 per cent recovery and a 13 per cent growth last year. According to the IIFL report, "Companies with exposure to certain categories such as skincare have been badly impacted, while companies with exposure to healthcare have seen a tailwind. We expect the moderate growth to continue (probably better than pre-Covid levels, which were considerably low) given the revival in the rural economy on the back of better farm prices and higher government support."
For Mehta of Centrum, some of the themes that they have been bullish on since the last couple of years include building materials (electrical goods, paints, adhesives), top private banks, select non-banking financial companies (NBFCs), life and general insurance, niche pharma and diagnostic companies, IT & automation, specialty and agro chemicals, consumer (discretionary & non-discretionary).
A Global Performer Too
The Coronavirus threat has roiled financial markets across the globe, but they went up on vaccine hopes and accommodative fiscal and monetary policies by governments and central banks. Over the past six months, the Dow Jones Industrial Average was up 15 per cent and the S&P 500 and Hong Kong's Hang Seng gave 18 per cent returns, while Japan's Nikkei rose 26 per cent. India emerged as one of the best-performing equity markets worldwide during this period, with 31 per cent growth, next only to South Korea's Kospi index, which was up 43 per cent. India's share in world market capitalisation climbed back to its historical average of 2.4 per cent, as on December 2020.
Dichotomy In Flows
A gush of liquidity flows from foreign funds has taken Indian markets to historical highs. Besides, it was the only emerging market to have witnessed FPI inflows in 2020, worth $23 billion - South Korea and Taiwan saw huge outflows of over $15 billion, while foreign portfolio investors (FPIs) pulled out around $8 billion from Thailand and Brazilian markets. So far, foreign institutional investors (FIIs) have pumped in Rs 24,469 crore in equities in January (till January 22) and infused over Rs 1.8 lakh crore into the market since it hit multi-year lows in March last year. "We have seen the historical highest-ever inflows from FIIs in the Indian market along with increase in India's weightage in emerging market funds,," adds Taparia of Motilal Oswal. That said, markets are not getting support back home due to profit-booking. Domestic institutional investors have sold equities worth over Rs 70,000 crore since March. Equity MFs on the other hand are witnessing immense redemption pressures from investors with unabated outflows for the past sixth months, close to an average of Rs 5,500 crore each month.
Forced to stay home, retail investors stepped up their participation in equities, which rose to a decadal high - in terms of average turnover - with retail market share hitting up to 70 per cent. The bustling Dalal Street saw a record number of, nearly 12 million, new demat accounts in 2020. "If you look at market volumes, on a long-term average basis, about 50 per cent of volumes used to be contributed by retail investors. But there are only two instances over the last 15 years, once during the global financial crisis (GFC) and the second, right now when the markets fell steeply and a lot of retail investors thought that we can manage our money ourselves. So right now, the share of retail investors in overall market volumes is upwards of 70 per cent. During the GFC, when markets became very expensive, the level started to normalise since it became difficult to identify stocks and allocate money. Therefore, going by the historical pattern, we do think that the ratio of retail investors directly investing into the markets will normalise, and that money will get routed back through mutual funds," said Amish Shah, India Equity Strategist, BofA Securities India, during a webinar recently.
The fear gauge is off its March highs and has dropped substantially by 73.2 per cent to 22.4. "The volatility index is hovering between 16 and 24 zones for the last two months and lower volatility is ruling out any major correction in the Indian market for now. However, post quarterly earnings, the key trigger for the Indian market would be the Budget," says Taparia of Motilal Oswal.