As rapid as the fall, the V-shaped recovery was equally fantastic. From a low of 7610, the Nifty closed 2020 at the threshold of 14,000, a solid 85% rally from the lows of March. Since pictures speak louder than words, here are 4 graphics that explain Indian markets in 2020.
Fear ruled, then tapered and then vanished
How do you measure fear in the stock markets? You can best do it with the VIX ratio. The chart captures the VIX versus the Nifty in 2020.
The first phase was between Feb-20 and Mar-20. COVID was spreading rapidly and a total lockdown of the Indian economy looked inevitable. That fear took the VIX all the way up from levels of 20 to 83. During this period, Nifty fell from 12,200 down to 7610.
The second phase from late Mar-20 till Jun-20 was the tapering of fear. This was the peak lockdown period but most businesses sustained at lower capacity. This led to fear tapering and VIX falling to 40 levels. Here, Nifty was tentative but did manage to get closer to 9000.
The last phase was about fear vanishing. A massive monetary and fiscal stimulus brought down VIX further, but investors did not want to be left out of the rally. Sep-20 results were the big conviction point. VIX tapered to 20 levels but Nifty spurted to 14,000.
When foreign investors said, “Risk hai toh Ishq hai”
In the year 2020, FPIs ignored all the risks and infused a record Rs167,523cr into Indian equities. Nearly 85% of the cumulative flows for the year came in last 3 months alone.
The month of March 2020 was a nightmare for FPI flows. The total net outflow was Rs122,000cr from equity and debt combined. However, from that point FPIs turned aggressive net buyers.
If you count from the lows of Mar-20, the cumulative FPI inflows since April are more than Rs225,000cr. Interestingly, FPIs continued to be net sellers in debt even as DFIs were sellers in equity. But FPIs more than compensated.
The real FPI story was scripted in the second half of 2020; more precisely in the last quarter. Global central banks infused $8.5 trillion as monetary stimulus and $11.5 trillion as fiscal stimulus. Apart from the flood of liquidity, the end of Trump era plus the BREXIT deal only added to the risk-on appetite of foreign inventors.
It was not a limited rally, but spread across stocks
When you look at breadth of market indicators like Advance/Decline ratio, upper/lower circuit ratio and high/low ratio; it is BSE data that is a lot more reliable.
When the circuit ratio (ratio of stocks hitting upper circuit to lower circuit) shoots up sharply, it is a signal of speculative build-up. That was evident in March, which led to the massive unwinding.
By November, the H/L ratio (ratio of stocks hitting 52-week high to 52-week low) shifted sharply higher. It means; markets are in uncharted territory and the rally is extremely broad-based. That is evident when you look at the performance of mid cap and small cap indices.
Falling bond yields and strong rupee; the perfect plot
Bond yields peaked at 8.2% in 2018. Even in early 2020, bond yields were at 6.7%. However, aggressive rate cuts and a mountain of liquidity meant that rates started tapering. At the same time, INR has strengthened on the back of abundant forex reserves.
Between April and December, the rupee strengthened by 5% to 73/$. For global investors, this is the bonus for investing in India, over and above equity returns. That gives the best macro explanation for the market resilience and bounce in the year 2020.