Two things stood out in Apr-21. Firstly, VIX was relentlessly above the 22-23 range hinting at a tentative market as reflected in the stock market volatility. Secondly, foreign portfolio investors ended up net selling Rs12,039cr in equities in Apr-21. This is a stark contrast, after $37 billion was infused by FPIs into Indian equities in financial year 2020-21.
To be fair, FPI inflows into debt somewhat offset the equity outflows. Also, domestic institutions like mutual funds and insurance companies continued to be net buyers in equities in Apr-21, just like in March. At a macro level, it was the Fed statement and the RBI monetary policy minutes that gave a sense of assurance that rates would not be hiked any time soon. This led to tapering of bond yields in India and a sense of relief for equities.
COVID crisis, vaccine drive, FPI flows and possible stimulus
In Apr-21, Nifty struggled to breach the 15,000 mark amidst sharp bouts of volatility. Here are some of the major news flows that shaped the market direction in April 2021.
- The second wave has been vicious with daily afflictions exceeding 400,000 in India. Most states have extended the lockdown and that is likely to hit economic activity and also negatively impact the nascent recovery.
- A lot will depend on how the vaccination drive is implemented across India and how quickly the critical mass is vaccinated. Unless, India is able to achieve substantial inoculation by July, growth could be a casualty and so could market sentiments.
- There was finally clarity that the monetary policy of the RBI and the Fed would continue to remain aligned. The continuation of low rates and easy liquidity as laid out by the Fed statement and the RBI policy statement, will give some respite to markets.
- Inflation was the big risk factor with supply side constraints likely to continue on account of the prolonged lockdown. We could have a situation of higher inflation and weaker growth and that could offer a policy dilemma for the RBI.
- Foreign flows were elusive in April 2021 with FPIs taking out Rs12,039cr. Of course, this is minuscule compared to the $37 billion infused in FY21. However, for short-term market sentiments to remain robust, positive FPI flows will continue to be critical.
Sectors that outperformed Nifty in Apr-21
The Nifty ended Apr-21 with -0.41% returns, compared to +1.11% returns in Mar-21. In short, the Nifty has hardly budged in the last 2 months. The Mid-Cap index bettered the large cap Nifty underlining that investors will still have to look at the smaller niche and focused companies for alpha generation.
The 2 big stars of Apr-21 were Metals and pharma. It was the second consecutive month of metals outperforming the Nifty. However, in Apr-21 the metal index rallied by 21.89% to emerge as the pick among the sectors. Metal stocks benefited from robust Chinese demand for steel and aluminium as well as robust prices on the LME.
The other big sector to gain was pharma, gaining 9.75% in the month of Apr-21. The demand for APIs and the opportunities thrown up by the vaccination drive kept pharma stocks on the radar. Investors also churned their portfolios in favour of pharma, more as a safe haven in these volatile and rather unpredictable markets.
Most sectors ended in the red in Apr-21
The Nifty returns of -0.41% may give the image of tepid markets but that was hardly the real story. About 7 key sectors underperformed the Nifty. Rate sensitives continued to be under pressure with autos losing -2.25%, PSU banks -4.75% and realty sector -7.35%. The volatility in bond markets in the light of the divergence between central bank statements and bond yields made investors cautious about rate sensitive stocks. The traditional defensives like FMCG and IT were also under pressure after valuation concerns started creeping into most of these stocks. Overall, the Nifty may have been flat in Apr-21 but the bias of the market was predominantly downward.
May 2021 could be decisive for markets
The big questions is whether the old principle of “Sell in May and go away” would hold in May 2021. One thing is apparent that May-21 will be a decisive month for the markets. With COVID cases at an inflection point, there are strong hopes of a fiscal stimulus. Additionally, the growth numbers may look optically good in May-21 due to the base effect. If you go by the corporate results till date, profits are higher yoy but lower qoq. Between inflation and Q4 results, we could see the story of market momentum defined in May-21.