Since July, the Nifty and the Mid Cap index have flattered the markets almost in all the months. Look back at the full year, and mid caps have done a lot better than the large cap index. Let us focus on what drove the Nifty performance in December 2020?
BREXIT deal and Trump’s last hurrah!
The two big questions in the minds of investors ahead of December were; what happens to BREXIT deal and what happens to the US stimulus. Fortunately, both went on smoothly.
- The BREXIT will happen on the last day of 2020 but the good news is that the trade deal is on and goods can move between the UK and the EU without tariffs and quotas. Of course procedures will be tougher, but markets can live with that.
- The biggest relief from the BREXIT deal was felt by the currency markets. UK-EU trade is worth £700 billion annually. That is large enough to spook currency markets and by striking the deal a week early, they saved the currency blushes.
- Trump may be on his way out but he surely had his last hurrah. He signed the US stimulus deal, which ensures that families continue to receive their cheques for the next few months and purchasing power does not get impacted.
- The trump deal led to a sharp recovery in the Indian markets because it meant that corporate IT spending would be robust and that is good news for Indian companies ranging from IT to auto ancillaries.
- December also saw hope building up ahead of Q3 results. The results season begins in the second week of January with the IT companies and the hope is that Indian companies will repeat the profit performance of the Sep-20 quarter.
- FPI flows continued to be robust in the month of December with over Rs60,000cr coming into equities in December. The total equity inflow of $23 billion in 2020 was the stamp of approval that kept markets buoyant in Dec-20.
Themes that outperformed Nifty in Dec-20
The Nifty returned a healthy 7.81% for December almost carrying the index to the brink of 14,000. That was unimaginable back in March, when the Nifty had touched a low of 7610. While mid cap index lagged the Nifty in Dec-20, the small cap index attracted a lot of buying interest generating 13.33% returns.
Dec-20 was a repeat of Nov-20 in the sense that all major sectors generated positive returns. The surprise package was realty which earned more than 20% in December backed by a pick-up in housing demand and realty companies ramping up their balance sheets. PSU banks saw a catch up rally, doing a lot better than private banks.
Pharma and metals did extremely well in December. Pharma is understandable. With the world moving on a war footing to achieve mass inoculation in the next 6 months, Indian pharma has a big role to play. After all, India accounts for 60% of vaccines manufactured in the world and 70% of WHO vaccine purchases.
Metals was the other big story. Hopes of a sharp revival in demand from China, coupled with the massive US stimulus, led to a spurt in metal prices on the LME. FMCG performed at par with Nifty but consumer durables did a lot better as a play on economic revival.
IT and private banks struggled in Dec-20
There were some interesting sectoral laggards in December 2020. Oil and Gas struggled as RIL had a tough time breaching Rs2,000 with questions over execution. Private Banks had a 22% rally in November and December was more like catching their breath. RBI report on Trends in Banking, warned of a spike in NPAs; and that did not help matters.
Surprisingly, IT underperformed the Nifty and that was largely due to the US stimulus weakening the US dollar. Autos are yet to excite the market; what with Tesla and the concept of EVs cornering all the attention in the auto industry.
What to look forward in the New Year?
We had mentioned in our previous monthly report that December could be quieter than November. While the Nifty rally was relatively subdued, FPIs continue to pump money into India. Come January and the focus shifts to the Dec-20 quarter results. If corporate bottom lines can repeat the performance of September, then the markets will have a lot to cheer about in the New Year.