The undertone of the Nifty continued to be positive in July 2020. Like in June, the month of July also yielded around 7.49% returns. As a result, the Nifty has now gained 16% in just two months. This marks the best two month returns for the Nifty since 2009. After the carnage of COVID-19, the Nifty is now just 10% away from its all-time highs and has recovered over 40% from the lows of March 2020. While the overall returns on the Nifty in Jul-20 was approximately same as in June, the underlying composition of the winners and losers changed sharply. The two big changes over June were that Banks underperformed as a sector in Julyand technology outperformed. That was largely a reflection of the quarterly results announced during July 2020.
July 2020 was about long on IT / Pharma and short on financials
It is not often that the Nifty gives solid returns despite the financials underperforming. The financials may have lost the old heft but they still account for over 33% of the Nifty. July 2020 was all about the emergence of IT as a major contributor in the Nifty 50 index. While TCS may have disappointed on the top-line, its operating margins were still robust. But the big positive came from Infosys which not only reported one of the best operating margins in recent times but also managed to provide strong guidance for the next year. That went down well with the markets as gains in Infosys also rubbed off on other IT stocks.
Banking was largely a victim of news flows. HDFC Bank and Kotak Bank showed stress on asset quality even as HDFC Bank was tepid due to a slew of top management exits. Even non-banking heavyweights like HDFC and Bajaj Finance witnessed pressure on asset quality and NIMs. Apart from all these factors, the withdrawal of EMI moratorium still hangs over the banking space. That, probably, explains the dichotomy.
Which sectors did better than the Nifty in July 2020?
In Jul-20, the action was back in the large caps with the Nifty-20 outperforming the mid-cap index by a margin of over 380 bps. Rate sensitives like banks, financials and realty came under pressure on EMI moratorium concerns and on the back of fears expressed by the RBI Financial Stability Report that gross NPAs could spurt to 12.5% in FY21.
IT index was the star of Jul-20 with 22.49% returns aided largely by positive guidance from Infosys and a catch-up bounce in stocks like TCS, HCL Tech and Wipro. Auto stocks were the surprise gainers in the month but they come from an extremely low base. Pharma stocks saw a lot of traction as a slew of Indian companies raced towards a vaccine for COVID-19. Most pharma players have their order books full with demand for Remdesivir and Favipravir coming from across the globe.
The other big story that bettered the index was the metals space. While steel demand continued to be tepid, most steel companies showed solid growth in exports to China. Also, China and the rest of the world are adding on to their stimulus and that is positive for metal stocks as LME prices are likely to remain buoyant. However, the recent GDP contraction in the US and EU region should be a dampener.
Some sectors did worse than Nifty in Jul-20
Banks and financials broadly disappointed. While private banks managed to give positive returns, the PSU banks were clearly under pressure. The Financial Stability Report of RBI has projected gross NPAs to move up from 8.5% to 12.5% over the next one year. Clearly, markets are expecting that bulk of the NPA accretion would happen in PSU banks.
Secondly, the RBI will have to take a call on withdrawal of moratorium at some point. At best, August deadline may be postponed but the RBI will have to bite the bullet sooner rather than later. Markets are expecting that it could lead to a spurt in recognition of NPAs, especially among retail borrowers and SMEs.
Like in June, FMCG stocks were subdued in Jul-20, generating just about 2.7% returns. Even the likes of Hindustan Unilever and Britannia are facing questions over top line growth. Nielsen has projected that FMCG sector growth could at best be flat in FY21. That has taken away the charm of FMCG stocks, although rural demand remains favorable.
In a nutshell, the big risk-on shift in stock markets may have just begun! But it is not so much about risk-off or risk-on as it is about equity as an asset class. A sharp recovery and lesser growth damage would automatically make EM equities attractive and India becomes a basket case for equities due to negative real rates of return. That could drive markets in the month of August too.