If you were to look at the Nifty in the first half of Jan-21 and compare with the second half, the index looked a study in contrast. Nothing much had changed fundamentally; except that the Sensex had scaled the psychological 50,000 levels, perhaps a bit too fast. The uncertainty ahead of the Union Budget also spiked the VIX and put pressure on the Nifty in the second half of Jan-21. After positive returns in October, November and December, the Nifty ended with negative returns of -2.48% in Jan-21. The mid-cap and small-cap index stayed in the positive, but only just.
As can be seen in the above chart, the fall in the last two weeks of January was a lot sharper in the large cap Nifty than in the mid-cap indices. The only cautionary sound here is that FPIs sold over Rs12,000cr in the last week of January.
Stimulus delay and Budget uncertainty
Two trends diverged in the second half of January. The market was either a one-way market or a buy-on-dips market; but suddenly turned into a sell-on-rises market. Secondly, after infusing Rs170,000cr in 75 days, FPIs turned tack and started selling heavily in equities.
• The stimulus package from the US was on the anvil but apparently that has been delayed for the time being. That has not gone down well with the markets leading to a global sell-off across key markets.
• The 50,000 level on the Sensex was a psychological barrier and that was evident after domestic and global investors rushed to lighten their positions. The spike in VIX added to the market uncertainty.
• Quarterly results in the Dec-20 quarter were not as flattering as the second quarter. The expectations were high after the Q2 results but Q3 showed that the benefits of cost cuts and inventory tweaks had saturated.
• Macros have not been really supportive post-September. Despite festive demand in the last quarter, most high frequency indicators like core sector data, PMI and IIP have shown signs of slackening momentum.
• Markets have built in rich expectations on tax cuts, infrastructure spending and a consumption boost. Obviously, pragmatism dictates that all these are not possible in the midst of budget constraints.
Sectors that outperformed Nifty in Jan-21
The Nifty ended Jan-21 with (-2.5%) returns on account of the 8% correction from the peak. Many companies did not live up to the expectations built in Q2 and the impact was visible in stock prices. However, there were some sectors that managed to beat the index.
The big outperformer was the automobile sector. Auto sales numbers for the month of Dec-20 were outstanding across categories. Apart from passenger cars and CVs, even two wheelers saw good traction in demand. Q3 auto results have been very encouraging; be it Tata Motors, Bajaj Auto, TVS Motors or Maruti. Auto sector gave 6.74% returns in Jan-21.
PSU banks and IT stocks also performed better than the Nifty. IT emerged as a hot favourite after IT companies across the board reported higher operating margins and gave stronger growth guidance. PSU Banks also enjoyed a good quarter in Q3 with sharp improvement in profits and loan losses substantially provided for. PSU banks gave 3.5% and IT sector 1.63% in Jan-21.
Pharma, metals, private banks and FMCG underperform
Private Banks saw Q3 top-line growth coming from treasury operations with wholesale banking showing negative growth. That was a dampener. FMCG stocks at rich valuations became easy targets for the sell-off. Oil & gas underperformed the Nifty on the back of volatile oil prices and concerns over how Reliance would execute its grand plans.
But the big underperformers in Jan-21 were metals and pharma. It was becoming obvious in Q3 that the benefits of the COVID vaccine will take longer to turn into profits. Sentiments were dampened by the likely delay in the full-scale roll-out of the vaccine. Metals lagged after the frenetic rally as too much was built into demand and price expectations.
All eyes will be on the Union Budget 2021
Few budgets, in recent years, have been as important as the Feb-21 budget. The economy needs a budget that engenders economic growth, boosts consumption and enhances corporate profits. Such goals are normally conflicting but that is where the finance minister has a real tightrope to walk.
In a way, the Union Budget will be central to the performance of the market in Feb-21. A very conservative budget would leave the markets disappointed and the buying enthusiasm may wane. Too much of aggression may raise questions about solvency, ratings and debt servicing, which FPIs will not be too impressed with. The success of Budget 2021 will predicate on how the Finance Minister walks the tightrope and convinces stakeholders that it is in their best interests. That could be the next part of the market story!