Two things stood out in May-21. Firstly, VIX made a shift to a lower plane. From the 22-23 levels in April, the VIX tapered to 16-17 levels, indicating that downsides were limited and fear in the market was waning. Secondly, foreign portfolio investors may have been sellers in April, but May-21 saw a turnaround in FPI sentiments, especially in the second half of the month. FPIs closed May with marginal inflows into India.
The real assurance for Indian markets came from the Fed minutes. The minutes were fairly emphatic that growth was picking up as was inflation. However, Fed also hastened to add that they did see inflation tapering once the commodity supply chain bottlenecks were addressed. The Fed almost assured markets that it did not intend changing its rate stance or bond buying program without structural justifications. The assurance was that rate hikes would only happen 1 year after QE tapering. That was the big boost for Indian markets.
COVID waned, inflation tapered, growth improved but Fed did the trick
May-21 marked an emphatic rally in the Nifty. Whether this rally sustains remains to be seen but some key factors made a difference.
- If April saw mounting worries over daily COVID numbers crossing 4 lakhs, May saw numbers taper to below 1.50 lakhs. Lockdowns played a big part, but the health crisis is in much better control now. The bigger challenge of mass vaccination still remains.
- Inflation tapered and almost came back to the median 4% inflation targeted of the RBI. The encouraging data point was that the sticky core inflation also saw a sharp fall in the month of May-21, although commodity price inflation is still an issue.
- Growth triggers flattered, irrespective of whether you look at core sector or IIP. One can argue that this is largely base effect, but at least optically it looks good. It gives hope that absolute GDP will get back to pre-COVID levels soon.
- FPI outflows were the big story in April and first half of May. Things turned around in the second half after the Fed minutes. The sharp fall in COVID numbers and promise of higher GDP growth helped FPIs become decisive net buyers in second half of May.
- The one big event that did the trick was the Fed Minutes which hinted at status quo on rates well into 2023. That gives sufficient breathing space to RBI to keep rates low and the stance accommodative. That is likely to be reiterated in the RBI June policy.
It would be simplistic to say that the rate sensitives outperformed the Nifty though that is broadly correct. While the Nifty gained 6.51% in May-21, autos gained 8.83% and realty index gained 8.58% in the month. There was a slight divergence in banking. SBI led the rally in PSU banks which emerged the star sector of the month gaining 18.05% in May-21. On the other hand, private banks gained about 6.33% in May, slightly lower than the Nifty returns. Cheap valuations and good quarterly numbers worked for PSU banks.
The other big story among the outperformers was oil & gas with 9.93% returns in May-21. Reliance lad the rally after the upgrade of its O2C business by Jefferies. However, there was broad-based participation from other stocks including IOC, GAIL, BPCL and even ONGC. Refiners had a stellar quarter assisted by record gross refining margins and hefty inventory translation gains due to crude spike. At an index level, both the mid-cap and small-cap indices outperformed the Nifty, but the gains were marginal. The arc lights were clearly focused on the Nifty.
All the sectoral indices ended in the green in May-21
In a month when Nifty was up 6.51%, it is hardly surprising that all sectors gave positive returns. However, metals lagged the Nifty in the second half while the defensives like IT, FMCG and pharma were relative underperformers. After all, who wants safety when growth is the Mantra?
As June starts, all eyes will be on the Monsoon. Inflation, growth, Fed minutes, FPI flows and lockdowns played a key role in the May-21 rally. Now it is for the Monsoons to ensure another normal year of rains and a bumper Kharif, so that growth momentum is sustained. Markets in May-21 has just given the signal that, possibly, the worst may be over!