How the Nifty and the Sensex panned out in 2020?
The Nifty and the Sensex saw a steep fall from January onwards and ironically bottomed out in late March when the lockdown was announced. The indices have done extremely well through the lockdown period, gaining as much as 38% from the lows. The pandemic may be far from over and the lag effect is still uncertain, but the market appears to be heavily betting on a combination of consumption and investment driven recovery in the Indian economy. That is manifested in the indices.
The Nifty and the Sensex are almost back to the levels that we last saw in early March before the vertical crash in the markets commenced. What exactly has driven this bounce in the Nifty and is it really sustainable. There are four interesting factors.
Foreign flows have been positive in Jun-20
The month of March saw record selling in equity and debt and that was manifested in the vertical fall in the market. For the first time since January, FIIs turned net buyers in the month of June as shown in the table below.
|Month||FII Flows in Equity||FII Flows in Debt||Overall FII Flows|
As can be seen from the above table, June was the first month in this year when FIIs gave up their risk-off approach and bought heavily into equities without selling too much in debt. That led to a turnaround in sentiments.
Global liquidity is robust
Over the last 5 months, global central banks have infused a glut of liquidity into the financial markets. From the Fed to the ECB, BOJ and the PBOC, the total infusion across central banks has been more than $15 trillion. As we have seen in the previous 2009 scenario, when there is a glut of global liquidity, EMs like India has been preferred avenues. After all, in an investment world starved for returns, Indian markets still promise above median returns with limited risk. As long as global liquidity is robust, Indian markets are likely to be in a sweet spot notwithstanding concerns over valuations.
India has given $300 billion boost to the Indian economy
During the 2008 Lehman crisis, the government and RBI had been overly cautious about cutting rates.This time it was different. The central bank announced rate cuts of 115 basis points despite repo rates being at a 20-year low. This was supported by liquidity infusion measures as well as liquidity tweaking across maturities using the now famous Operation Twist. To add to these monetary incentives, the government matched it up with fiscal support consisting of sops for SMEs, easy funding for NBFCs, partial loan guarantees and tax incentives. The overall benefit was $300 billion and the multiplier effect could be much larger. But the moral of the story is that the urgency showed by the government was sufficient to enthuse Indian industry to think big for the future in terms of fund raising and capital investments.
Finally, of course, Reliance kept the growth flag flying
It is not often that you get to see the most valuable company in the market doubling its market cap in less than 3 months. But that is exactly what happened as Reliance gained more than 100% since the lows of March 2020. The reasons were not far to seek. The company completed a mega rights issue worth Rs.52,300 crore in its journey to become zero net-debt. In addition, it managed to raise Rs.116,000 crore by placing over 25% in Jio Platforms to marquee names including Facebook, Silver Lakes, KKR, TPG, Abu Dhabi Investment Authority and Mubadala among others. This one factor underlined that there was ample global appetite for Indian paper if structured and sold properly.
The miasma of the pandemic is far from over. Coronavirus cases are still rising and the lag is the joker in the pack. High frequency data points like IIP, core sector and PMI are showing improvement over April and May but contraction is still a reality. But, the market is depicting optimism about the future. It may just be the right time to raise a toast to the stupendous recovery in the Nifty and the Sensex!