Equity markets globally have had a historical journey in last one year, a year of huge volatility, unpredictability, pessimism, divergence and optimism. The Sensex touched its previous all-time high of 42,273 in January 2020 and then went on to hit a three-year low of 25,639 in March 2020, falling 40 per cent from the peak as the Covid-19 pandemic gripped the world, posing a big threat to economies the world over.
The unlocking of the domestic economy since June 2020 led to a significant recovery in various macro, micro and high frequency data points, resulting in equity indices surpassing their previous lifetime highs once again.
Strong FII inflows, good corporate earnings and encouraging trends from the festive season suggest the demand recovery is likely to continue. Sensex touched 50,000 on Thursday, up more than 95 per cent from the lows touched in March 2020, while Nifty closed in on the 15,000 mark.
Corporate India’s strong focus on balance sheets, cash flows, and cost controls helped tide over this difficult period (March-Sept 2020), as large companies gained market shares in an environment, where unlisted and smaller players encountered multiple challenges.
In addition to opening up of the economy, an 80% reduction in active Covid-19 cases since September 2020, and strong high frequency macro data points have lifted sentiment. A pickup in property registrations in key metro cities like Mumbai after a long time augurs well for broader macros, as a sustained pick-up in real estate would have a multiplier effect on the economy.
Further, recent rollout of Covid-19 vaccines has provided a booster shot to the Indian market, which has since been on steroids, with broader participation from midcaps and smallcaps.
FII flows saw strong momentum since October 2020 with November 2020 recording best-ever monthly inflow of Rs 65,200 crore. This continued in December 2020 and January 2021 too.
Apart from being driven by FII investments, the ongoing stocks rally has also been led by direct investment by domestic investors. The sharp drop in Indian stocks in March opened up an opportunity for stock picking, which saw a clear shift in the way retail investors participated in the stock market. Along with the sharp rise in the number of new retail investors, existing ones too have shifted heavily towards direct equity investment in the months since April 2020 from the preferred route of mutual funds.
Over the past nine months, there has been a big rise in retail investors going in for direct stock picking, and there has been a significant jump in investor accounts. This is also well reflected in the rising share of non-institution in the overall cash volumes – which touched a peak of more than 70% in mid-CY20.
The pandemic also led to a sharp divergence all across and within sectors and companies – highlighting the differentiated impact of Covid on various sectors. Clearly, the essentials (healthcare, staples) and technology/online/e-commerce businesses were impacted far lesser than financials, cyclicals and discretionaries. In fact, for healthcare and technology sectors, the pandemic acted as a tailwind, which can be gauged from their sharp outperformance in 2020 – pharma/IT up 59%/49%. On the contrary, financials, especially PSU banks, bore the maximum brunt of Covid-19, down 30% YoY.
Sensex touched a historical high of 50,000 today for the first time ever. Indian markets have been witnessing strong momentum over the past few months on the hopes of a faster economic recovery after the pandemic lockdown. Also positive global cues, sustained FII inflows and strong corporate earnings kept the sentiments high. Buzz around the forthcoming Budget has also added strength to stocks. Expectations are that the Budget would potentially lay the foundation for long-term economic growth.
Overall, we expect the market to continue its upward journey on the back of healthy corporate earnings, strong liquidity, positive developments on the vaccine front, broadbased economic recovery and low interest rates.
Our top largecap picks at this stage are Infosys, ICICI Bank, SBI, Muthoot Finance, UltraTech Cement, M&M, Ashok Leyland, Bharti Airtel, HUL, Titan, Divi’s Labs, HCL Tech, while midcap picks include AU Small Finance Bank, JSPL, JK Cement, Tata Consumer, Oberoi Realty, IEX, ICICI Securities, Varun Beverages, SEIS and Gujarat Gas.
(Hemang Jani is Head Equity Strategist at Motilal Oswal Financial Services. Views are his own)