There were 3 phases to the rally in Sep-21. Despite FPIs selling on most days in equities, they were aggressive buyers in debt, indicating confidence in the currency and yields. Secondly, Fed minutes were ambiguous enough to indicate that rate hikes and taper would still be a bargaining chip and not a policy commitment. However, the last week saw weakness in Indian markets due to the combined effect of the Chinese Evergrande crisis, US inflation and the possibility of RBI hiking the reverse repo rates in Oct-21.
The large caps tapered in the last week even as mid-caps continued to outperform in Sep-21. The risks to the market came from the higher risk assumption as was evident in the VIX rising during the month from 14 to 20 levels. Markets are factoring in the fear factor into option premiums. The Evergrande crisis in China was the party spoiler as there were fears of a hard landing for China and of China allowing the Yuan to weaken. Markets are anticipating a policy response from RBI in October, which could entail a hike in the reverse repo rates by 15-20 basis points.
Macros, Evergrande, US Inflation, IPO and Reverse Repo concerns
August 2021 saw a decisive upward breakout in the Nifty, gaining 8.69%. Relatively, September was more subdued at +2.84%. There were 6 triggers that defined Sep-21.
a) Inflation continued to weaken in September even as core sector growth and IIP hinted at the Indian economy finally getting at par with pre-COVID levels.
b) While Evergrande crisis in China put pressure on metal stocks due to China hard landing concerns, oil & gas continued to do well on crude price gains.
c) US inflation has risen to above 5% and Powell and Yellen have testified that inflation could stay higher for longer than expected. This pushed up yields.
d) The IPO scene was a lot more subdued in September compared to August. Only 2 issues hit the markets, but demand continues to remain robust, which is the good news.
e) FPIs were selling heavily in equities in the second half of September. However, domestic buying continued, even as FPIs remained net buyers in debt.
f) It is expected that RBI may hike reverse repo rates as suggested by MPC member Jayanth Varma. That spooked markets in the last week of September.
Sectors that outperformed the Nifty in Sep-21
For the month of Sep-21, out of the 10 major sectors with significant presence of investable companies, 9 sectors gave positive returns with metals being the only sector to give negative returns. Unlike August, the performance of the markets was more broad-based with the mid-cap and the small-cap indices doing better than the benchmark Nifty. This was, however, accompanied by a sharp spike in the VIX to above 20 levels.
Which sectors did better than the benchmark Nifty? The top gainer was Realty index with 32.8% returns; largely led by record first-day sales by Godrej Properties in its recent NCR project launch. Realty companies, across geographies reported a spike in housing offtake. Consumer durables was another sector that gained 10.18% in Sep-21 on hopes of revenge buying post the pandemic. They are also considered relatively safer bets.
As crude got closer to $80/bbl, the oil & gas sector also outperformed with 8.36% returns in Sep-21, led by a surge in RIL. Another surprise gainer was PSU banks with 6.34% returns on hopes of more banks coming out of PCA framework, like IOB and UCO. Rate sensitives were robust in Sep-21 with private banks and autos also doing better than Nifty returns.
Metals, pharma, IT and FMCG underperform Nifty in Sep-21
October could be an uncertain month with a number of X-factors. The fallout of Evergrande is still not clear while US inflation poses a macro risk. The RBI has hinted at a hike in reverse repo rates and a tapering of liquidity. A lot will depend on how the quarterly results for Sep-21 quarter match up to the market euphoria.