The year 2020 began with the overbearing gloom of the COVID-19 pandemic and the situation just got worse over time. Markets crashed sharply between January and March with the Nifty and the Sensex losing over 35% in a short span of time. However, post March 24, the rally has been phenomenal to the extent that by December the Nifty and Sensex are at life-time highs. One can debate the pros and cons of the valuations but that is off the point. Here we look at how the three set of stocks; large caps, mid caps and large caps performed in the Indian markets in the 8 month period from April to November 2020.
How the Nifty-50 fared in FY21?
If we have to look at the large cap universe, there is no better proxy than the Nifty-50, which comprises the 50 largest and most influential companies in India. Here is a quick look at the monthly returns on the Nifty since April. These are sequential returns.
Let us not miss the larger picture. Since April 2020, the Nifty has given average compounded returns of a phenomenal 5.28% per month. Yes, you heard it right; it is 5.28% per month. To a large extent that can be attributed to Reliance and key heavyweights like HDFC Bank, Infosys, Bajaj Finance, Kotak Bank etc. Negative returns were seen only in 2 out of these 8 months and these were nominal corrections.
While April was the best month with 14.7% returns on the Nifty, the returns in Nov-20 are a lot more commendable. That is because it comes after a phenomenal 50% rally in the Nifty. The November rally was driven by a plethora of factors like the election of Joe Biden, hopes of a vaccine, signals of a macro recovery and better than expected corporate profits. The one factor you cannot ignore about FY21 is that you would have earned a whopping 5.28% compounded, on a monthly basis, by just staying invested in the index.
How the Nifty Mid-Cap Index fared in FY21?
If you compare on compounded monthly returns, the mid cap index did better than the Nifty giving 6.06% compounded returns each month. So, it was not just about the large caps participating but a whole lot of mid caps also participated and contributed to the breadth of the market and the sustainability of the rally.
Returns on mid caps were a lot more consistent as compared to the large caps considering that there was only one month when the returns were negative. Again, the 13.49% returns in November came after a very solid rally. Unlike large caps, the mid caps were slightly late to start off on the rally. They caught up only after it became clear that low interest yields and a stable rupee were aiding performance. It can be seen that out of the 8 months of this fiscal, the mid cap index has delivered double digit returns in 3 of these months.
The rally in November has been a lot sharper for the mid caps as compared to large caps for multiple reasons. Most mid caps managed to report growth in top line as well as very sharp growth in profits on the back of cost control measures undertaken during the quarter. At a macro level, the recovery in IIP and GDP are expected to become substantial boosters for the mid cap players. Many of the direct beneficiaries of the pandemic in the pharma and IT sector are actually mid cap stocks that have managed to perform exceptionally well. Apart from an assurance of low rates from the RBI and a strong rupee, weak oil prices have also been instrumental in mid cap returns. Above all, the big takeaway is the 6.06% monthly compounded returns delivered; year to date.
How the NiftySmall-Cap Index fared in FY21?
Contrary to the belief that small caps would be vulnerable in any economy downturn, the small caps have done the best among the three categories. Apart from the fact that they delivered positive returns for 7 out of 8 months, the compounded returns were also much higher at 7.29% per month.
What explains the outperformance of small caps in a tough market? Firstly, institutional investors have been searching down the market cap pecking order in search of alpha. That created institutional demand for smaller stocks. Secondly, like the mid caps, the small caps also benefited from more focused business models, dividends of cheap oil and stable rupee;apart from aggressive cost cutting measures.
In a sense, the Sep-20 quarter has been a kind of watermark because all the 3 indices managed to rally aggressively despite a much higher base. A lot would depend on leveraging these benefits in the coming quarters.