Unlike Jan-21, when Nifty ended with negative returns, Feb-21 was a month of strong positive returns on Nifty and other key indices. But the final number conceals the sharp spike in volatility during the month and the vertical fall in markets in the last week. Had it not been for the bounce in markets due to short covering post-NSE trading halt, the outcome could have been less flattering.
In February, the Nifty again scaled above 15,200 and the Sensex scaled above 51,000 but these levels failed to hold and the markets closed well below the psychological support levels. What should actually worry markets is the VIX spiking to 29 levels, which is a warning signal of rising fear factor in the markets.
The overall FPI numbers for Feb-21 must be taken with a pinch of salt for two reasons. Firstly, FPIs saw selling to the tune of Rs8,500cr on 26-Feb, even in the absence of any block deals. The positive FPI buying of Rs28,500cr on 24-Feb was largely driven by the Bosch block deal and may not be representative. But there have been reports of basket selling in front-line stocks by several large long-only institutions.
Budget, bond yields, airstrikes and more…
February started with optimism in markets but ended with a lot of self-doubt. A clear picture will emerge in March and hence sectoral return numbers must be tempered in terms of how much value they lost from their peak. Here are some key triggers in Feb-21.
Sectors that outperformed Nifty in Feb-21
The initial boost came from a big-bang budget. Liberal fiscal deficit targets, a big boost to infrastructure spending and aggressive privatization and asset monetization plans meant stock markets could hope for quality paper in the market.
Towards the end of Feb-21, the US air strikes in Syria underlined that the more things change, more they remain the same. It looks like the Middle East geopolitical crisis is not going away in a hurry.
Quarterly results in the Dec-20 quarter had some hiccups but the overall picture was that the top-line and bottom-line had grown impressively on a yoy basis. Of course, the big question is on profits, now that operating levers are almost exhausted.
High frequency growth indicators like core sector, PMI and IIP showed that growth may still take time but economy had bottomed out. Towards the end of the month, the positive GDP was good news and should keep markets in good humour.
The biggest story of Feb-21 was the sharp spike in bond yields. US bond yields have doubled from 0.68% to 1.39%. Indian yields have spiked well above 6.18% and the 40-bps rise is raising the spectre of rate hikes. The big question for markets is whether RBI will be inclined to hike rates sooner rather than later.
The Nifty ended Feb-21 with +6.56 returns, despite the sharp correction towards the end of the month. However, the mid cap and small cap indices did a lot better than the Nifty as the subsequent correction in smaller indices was not so steep. Clearly, institutional selling was focused on large caps, as US bond yields suddenly looked attractive.
The two big stars of Feb-21 were PSU banks and Metals. The rally in PSU banks was largely driven by a SOTP re-rating of SBI after the bank showed a sense of urgency in monetizing group assets. Recent reports have suggested that in the coming months, the strain of unsecured loans would be more on private banks than PSU banks. Metals continued a solid performance as a combination of local and international demand combined with robust LME prices. PSU banks rallied by +31.88% and metals by +24.21% in Feb=21.
Among the other outperformers were rate sensitives like realty and private banks. A lot of these gains got tempered in the second half on rising bond yield fears. Oil & Gas also gained over 14.5% in Feb-21 led by crude prices spiking to $65/bbl. Reliance Industries hiving off its O2C business into a separate entity came as icing on the cake for market sentiments.
Defensives underperformed Nifty in Feb-21
Feb-21 clearly belonged to the aggressive sectors with defensives like IT, Pharma and FMCG giving negative returns. The big growth boost given by the Union Budget appears to be a lot more value accretive for the high beta names even as defensive sectors have become richly valued in the last few months.
Bond yields could be the factor to watch out for
With the Budget and GDP euphoria done and dusted, the focus shifts to bond yields. Rising bond yields have larger implications for corporate borrowing costs and equity valuations. It also means higher opportunity cost for equity investors. The only consolation is that governments still need to borrow heavily so they cannot afford high yields. The focus now shifts to the US Fed and the RBI for setting the tone of monetary policy in the months to come.