Two things characterized the month of Jun-21. Firstly, VIX shifted to a much lower plane in Jun-21. For example, between April and May, the VIX tapered from average of 23 levels to around 16 levels. In June, the VIX further tapered from 16 levels to below 12. This is a signal that the fear factor is waning and downside risks for the Nifty may be limited. Secondly, foreign portfolio investors were net sellers in April and May but Jun-21 saw a turnaround in FPI sentiments. There is one word of caution. FPIs did sell heavily in the last week of June, and therefore July may prove to be the real test of FPI conviction.
Fed hinted at rate hikes in 2023 and it was the turn of Jerome Powell, in his testimony, to soothe frayed nerves. Powell virtually assured the global markets that any tightening of rates or liquidity was unlikely till the US economy reverted to full employment; measured by joblessness at 4.5%. That puts an additional layer of comfort for markets at a time when US inflation and US GDP growth were hinting at front-ending of rate hikes by the Fed.
COVID, Vaccinations, inflation, Reliance AGM, Q4 results, Powell Testimony
Jun-21 saw a highly range-bound Nifty stuck in a range of around 300 points, at best. There were 6 triggers that defined the June story.
- COVID numbers came back to realistic levels, although the risk of COVID 3.0 is still live. However, the good news was the pace of inoculations with India crossing the US.
- Vaccinations were not just about the incredible growth numbers but more candidates like COVAXIN, Sputnik and now even Moderna likely to be launched in India.
- The news on the inflation front was not encouraging. Headline inflation spiked but what was more disconcerting was the core inflation scaling to an 83-month high.
- Reliance AGM was the big event and it did not disappoint. However, Rs75,000cr green investments and a proposed smart-phone launch with Google in September failed to enthuse markets. The concern was over pressure on some of the ratios.
- Finally, the Q4 season came to an end just a few days before the next quarterly season begins. Net profits grew 33% sequentially and that was way beyond the most optimistic expectations. Cost controls are still working wonders for Indian companies.
- Finally, a word on the Powell testimony which manage to soothe frayed nerves. Powell has ruled out any tightening for now and that is what eventually worked for markets.
At a macro level, it was the small caps and mid-caps that outperformed the large caps. However, that is just part of the story. The sectoral trends clearly veered towards defensive stories. IT was the star performer with 7.57% returns and it was substantially helped by the weakening of the rupee during the month. Surprisingly, consumer goods and FMCG were among the top performers with both these sectors expecting a strong bout of revenge buying once the lockdown was lifted.
PSU banks with 3.8% positive returns were a surprise inclusion in the gainers list, especially since private banks were among the worst performers. PSU banks emerged as value plays in June after Indian mutual funds were found to be gorging heavily on PSU banks and other PSU stocks as value plays. With the renewed thrust on speeding up vaccinations, it looks like even pharma has been among the outperformers during the month of June. Metals and autos also managed to do better slightly better than the Nifty on the strength of robust Q4 results.
Private banks and hydrocarbons disappoint in Jun-21
Two heavyweight sectors underperformed the Nifty and gave negative returns viz private banks and oil. The oil stocks were led lower by Reliance Industries while other oil stocks also peaked during the month on margin concerns. With a combined weight of over 40%, they had an oversized impact in depressing Nifty returns.
There will be some key data points to watch for Jul-21. Monsoon progress has been tardy and inflation is sticky. Fed has provided the macro comfort, but most FPIs continue to be extremely sceptical about the long-short EM-Dollar trade. That may have played out. A lot will depend on how successfully, India is able to build on growth recovery and ensure that the spectre of COVID 3.0 is exorcised. That will hold the key to markets!