The returns on the Nifty and other key indices were extremely weak for the month of Feb-22. If you look at the market cap comparisons; Nifty closed (-3.15%) lower, Nifty Mid-Cap closed (-6.97%) lower while Nifty Small Cap closed (-11.44%) lower for Feb-22.
There was selling across the board with almost all the indices ending in the red during Feb-22. If a hawkish Fed and input inflation played spoilsport in the first half of the month, geopolitical risk played that role in the second half. Through the month of Feb-22, FPIs sold heavily in equities as the INR came under intense pressure .
The FPI selling can almost be classified as the real pain point of Feb-22. The risk-off sentiments remained dominant through the month. In Feb-22, FPIs sold Rs35,592cr of equities or approximately $4.74 billion with limited support from IPOs. If you look at the first 2 months of calendar 2022, FPIs sold Rs68,896cr of equities or approximately $9.20 billion.
Looking back at Feb-22 and looking ahead at Mar-22
If Year 2021 was a solid year for equities as an asset class, the first 2 months of 2022 have been tough, to say the least. As a plethora of factors combined to spook the markets, there was virtually no let up. After some signs of enthusiasm on Budget, it was pressure all through the month. Here is what drove markets in Feb-22 and could impact Mar-22 also.
a) The geopolitical scenario is the joker in the pack. As of now, Russia has invaded Ukraine and the Western reaction in the form of sanctions has just started. The next few weeks will actually decide how this war pans out, and the changing geopolitical equations.
b) One big casualty of the war in the Ukraine is crude oil. During the last week of Feb-22, the price of Brent Crude went as high as $105/bbl before settling below $100. However, traders continue to remain bullish on oil and that is not great news for Indian markets.
c) Q3FY21 results ended the season with growth overall but there were 2 key takeaways. Firstly, the pressure on operating margins has been intense due to rising input costs. Secondly, the pressure on rural sales in most sectors has been quite apparent in Q3FY21.
d) What will the US Fed do in March? That remains the billion dollar question. On the one hand, inflation is at 7.5% and a 50 bps rate hike looked on the cards. However, with the changing geopolitical situation, it remains to be seen if the Fed still holds its stance.
e) Another big X-factor is the Indian Rupee. In the last week of Feb-22, the rupee briefly plunged beyond 76/$, but gained heft after that. The RBI is comfortable with $640 billion of reserves but may not intervene beyond a point. As we have seen in the past, the pressure builds when there is a rush by OMCs to hedge dollar risk.
f) Finally, on the Omicron front, the focus has shifted to Ukraine, but that is not the point. It looks like Omicron may not be such a serious threat but it must be said that it has certainly hit India’s GDP estimates for FY22 by a full 60 bps already.
Negative on Markets, but metals shine in Feb-22
Out of the 10 sectors evaluated for Feb-22, only 2 sectors gave positive returns, while 8 sectors gave negative returns. With the Nifty down -3.15% in the month of Feb-22, it was the rate sensitives that took it on the chin. That was expected with the rising inflation hinting at an early and aggressive rate hike by the US Federal Reserve.
The big star of Feb-22 was Metals, which was up 7.74% for Feb-22, amidst a sea of red. The big bet is that as sanctions over Russia tighten, a lot of steel and aluminium exports from Russia would be constrained. That would open a huge opportunity for India, which is already the second largest producer of steel in the world, after China. Also, the prospects of a global shortage of metals and ores due to the tensions in Russia, led to a sharp spike in metal prices on the LME, boosting Indian metal stocks further.
Metals may have been the only sector to give robust returns in Feb-22, but there were a number of other sectors that did better than the Nifty, despite giving negative returns for the month. Consumer durables gave faintly positive returns of 0.93% in Feb as the largely domestic nature of Indian demand is unlikely to be impacted by the vagaries of global economics and geopolitics.
There were other sectors that may have given negative returns in Feb-22, but the eventual fall was lower than the Nifty. For instance, pharma fell just -1.91% against a -3.15% fall in the Nifty. While Pharma stocks have been struggling with the end of COVID dividends, they held value in a tough market. IT and FMCG were also down in Feb-22, but the fall was less than Nifty. Both sectors took a sharp hit in January after Q3 results showed pressure on operating margins. With most of the bad news factored into prices in Jan-22, the performance was relatively better in Feb-22.
Rate sensitives and small stocks were the worst hit in Feb-22
If you look at Feb-22, the rate sensitives were hurt badly. Auto stocks lost -7.54% and realty lost -9.13%. While private banks had a tough month, it was the PSU banks with -10.55% fall that was the worst performing sub-sector. For the PSU banks, it was more of a reversal of the Jan-22 story, wherein it had been the top gainer. With the Fed likely to turn hawkish and the RBI likely to soon follow suit, rate sensitives are likely to see pressure.
The real story of pain in Feb-22 was about smaller stocks. The mid-cap index was down -6.97% while the small cap index fell -11.44%. Amidst the uncertainty of war, investors are unwilling to bet on smaller names. With higher oil prices and a weaker rupee, smaller companies are looking a lot more vulnerable.
The month of Feb-22 saw a sharp worsening of sentiments. The Union Budget is done and so is the February monetary policy. The key events to watch are the Ukraine situation and Fed action. For now, Indian markets have to just wait and watch!