When the Covid-19 pandemic started spreading rapidly across the world in February 2020, capital markets were among the biggest casualties. Fearing the worst, investors dumped stocks and rushed to safer assets. The NSE Nifty 50 index, which had hit a life high of 12,430.50 on January 20, 2020, crashed 40 per cent, to 7,511.10 on March 24, 2020.
However, it bounced back in no time, and there has been a relentless rally since, backed by the fiscal stimulus measures unleashed by the central banks and governments. With interest rates crashing to near zero in many developed markets, foreign institutional investors (FIIs) channelled huge amounts into emerging markets, driving them to dizzying heights.
On January 21, 2021, the Nifty 50 touched 14,753.55 in intra-day trading, which is more than 96 per cent jump in ten months. The BSE Sensex surged from 25,638.9 on March 24, 2020, to 50,184.01 on January 21, 2021. The 96 per cent rally has been driven by a flood of FII money, a faster-than-anticipated recovery in the economy and the better-than-expected corporate earnings growth.
“In March 2020, when the markets fell sharply, investors were factoring in the worst case scenario. From there on, as the lockdown was lifted, it was evident that the economy was slowly and steadily limping back to normalcy, and the markets started factoring in some degree of normalised economic growth,” said Shibani Sircar Kurian, head of equity research at Kotak Mahindra Asset Management Company.
Several positive developments influenced investor sentiments over the past few months. For instance, even as the pandemic continues to create havoc in Europe and the US, cases have been falling in India since September. Corporate earnings in the July-September quarter were much better than expected, and early results by companies indicate a further pick up in the December quarter. After contracting a record 23.9 per cent in the June quarter, India’s economy has been recovering; it contracted 7.5 per cent in the September quarter and is expected to turn positive in the December quarter. Vaccines of several companies getting approved have also raised hopes of taming the pandemic.
“Recovery in India has been sharper than earlier expected as seen in the continuous improvement of high frequency indicators from the lows of April 20. Performance of companies whose results have already been declared are better than expected, leading to earning upgrades and aiding the upward momentum in the market,” said Kurian.
Amid all these, FIIs pumped in Rs1.7 lakh crore into India’s equity markets in 2020, a 68 per cent year-on-year growth. Interestingly, foreign investors had pulled out Rs61,973 crore in March 2020. As global liquidity continues to remain abundant, the FII flow is expected to remain strong. As of January 22, 2021, they had invested Rs24,469 crore. “The dollar being weak, we are seeing a lot of that money coming into emerging markets. India has clearly been a big beneficiary of the FII flows and that is what has lifted the markets,” said Kurian.
As the markets have rallied, Indian investors, too, have taken to buying stocks in a big way. About a crore new investors entered the markets in 2020, which is more than twice the new investors in 2019.
The economy is expected to see a strong rebound in 2021. Fitch Ratings forecasts India’s real GDP to grow 9.5 per cent in the next financial year, though on a low base. Rural demand has remained fairly buoyant despite the pandemic, which will benefit companies like two-wheeler makers, farm equipment makers and construction material providers. Ratings agency CRISIL is expecting a 10-12 per cent rise in tractor industry volumes this year. Commodity companies are also expected to benefit, as global economies revive. The catch, however, is that the markets might already have run up well ahead.
The Nifty 50 is currently trading at more than 22 times one-year forward earnings (stocks’ prices over their predicted earnings per share for the next fiscal year), which is 23 per cent higher than the average of the past 10 years. Nomura Securities’s December 2021 target for the Nifty 50 was 14,680. For a few other brokerages, the year-end target was around 15,000, which is less than 5 per cent upside this year from current levels.
Mahesh Patil, who spearheads equity investments at Aditya Birla Sun Life Mutual Fund, said that in the near-term markets looked over-priced, but the ample liquidity and capital flows into Indian equities would continue to drive them. Also, India is entering a phase where earnings recovery would be much stronger than what was seen in the past few years.
A word of caution, however, is in order. “One can’t take a blanket call that anything and everything will go up. The margin of safety is a little less now,” said Avinash Gorakshakar, director (research) at Profitmart Securities.
He expects some profit booking this year and a slowdown in foreign investment once the US economy starts recovering and the dollar strengthens. “Last year was something out of the blue,” he said.
“When we look at the earnings growth and valuations, we believe equities can deliver around 10-12 per cent compounded annual growth over the next three years,” said Patil.
There are several pockets of opportunities even though headline valuations may be expensive. “Covid-19 has resulted in a significant shift in market share from unorganised to the organised segment as larger players have stronger balance sheets and thus the ability to withstand stress better. So, across sectors we are seeing consolidation, and we are trying to identify companies that are not only geared towards earnings recovery, but also will gain market share in their sectors,” said Kurian.
With private sector investment unlikely to revive in a big way in 2021, all eyes will be on the government’s thrust on infrastructure. This will benefit companies in sectors like capital goods and infrastructure. The government’s ‘Make in India’ push through the recently announced production-linked incentives could also boost industrial and construction companies.
“The pharma and IT sectors are likely to witness stronger growth over the next 3-5 years, driven by structural changes in cost structure and demand environment, respectively,” said Saion Mukherjee, head of India equity research at Nomura Securities.
Companies raised an all-time high Rs1.77 lakh crore in 2020 via initial public offers, follow-on public offers, offer for sales and qualified institutional placements. It was just Rs82,241 crore in the previous year. There were 15 mainboard IPOs that hit the market last year, raising more than Rs26,000 crore, according to Prime Database, which monitors primary market data. Nine IPOs saw a subscription of over 10 times. Burger King, Happiest Minds Technologies and Mrs Bectors Foods doubled their value on listing.
Several big ticket IPOs, including those of the state-owned oil refiner Bharat Petroleum Corporation and the country’s largest life insurer, Life Insurance Corporation of India, are expected this year. These will be big triggers for the market and attract a huge investor interest.
The Rs4,600 crore IPO of state-owned Indian Railways Finance Corp a week ago got subscribed over three times. Railtel Corp, Kalyan Jewellers, Barbeque Nation and Zomato are also hitting the markets this year.