August 2020 did not disappoint with monthly returns of 2.57%. This comes on the back of 15% returns on the Nifty in the 2 months prior to that. In fact, if it was not for the 260 points correction in Nifty on 31 August, the Nifty returns would have been a lot more impressive.
Aug-20 saw action returning to rate sensitives
August was a month of reality check in 3 distinct ways. The GDP growth (contraction) for Jun-20 quarter was to be announced during the month. The new margining system for equities was to be effective from September. Above all, the EMI moratorium was slated to end on August 31, and RBI had given enough indications that it would not be extended. Unlike June and July, August was about a return to reality.
The positive action in July shifted in favour of rate sensitive stocks. Markets had been disappointed by the RBI not cutting rates in its August policy. However, that was more than compensated after the Fed indicated that it would keep rates close to the zero levels for as long as required.
The bigger boost to Indian markets came from the US Fed new policy framework (NPF). This new framework shifted the criterion for rate setting from inflation and jobs to growth. While inflation will be a driving force, the Fed clarified that they would be willing to keep rates near zero even if at inflation above 2%.That gave confidence to Indian markets that RBI would also keep rates low and liquidity taps flowing. That explains the shift in favour of financials in Aug-20.
Another trend emerging in August is that the action is gradually shifting from the large caps to the mid caps and the small caps. While the Nifty was up by 2.57%, the mid cap index was up 8.93% while the small cap index was up a whopping 12.47% in August. Clearly, the trade in August was more stock specific withtraders showed more risk appetite.
Which sectors did better than the Nifty in July 2020?
Clearly the month of August belonged to the rate sensitive sectors after the comfort given by the Fed NPF. Sectors like private banks, PSU banks, autos and even realty did much better than the Nifty. These were the sectors that led the Nifty higher.
Interestingly, the star sector with a monthly return of 13.37% was the metals space. There were two major triggers. Firstly, the monthly off-take numbers reported a sharp spike in Indian steel exports to China and Vietnam and that compensated for tepid local demand for steel. Secondly, the LME prices of metals were buoyant as China indicated that it was willing to spend its way out of trouble. The massive liquidity boost by the ECB is also likely to stimulate demand for metals in the EU region. The rest of the Nifty outperformers were largely dominated by rate sensitive sectors like banks, realty and autos.
Defensive sectors did not fare well in Jul-20
In a month which belonged to the rate sensitives, the traditional defensives did not do too well. For the third month in a row, FMCG was subdued. While FMCG still enjoys high brand value, its rich valuations are being questioned as top line growth comes under pressure.
Technology was another sector that ended with negative returns in August. Most IT stocks rallied post the lockdown and it was more of normalization rather than a correction. Global tech spending is likely to come under pressure and indications of pricing pressure are already visible. However, IT remains a solid defensive bet in the Indian market.
Oil & gas stocks were another disappointment in the month of August. The oil sector has been dominated by Reliance Industries in terms of weightage and the stock was under pressure through August. This was after a slew of brokerages warned that the price may have factored most of the positives. Other oil stocks had been tepid on the back of weak crude prices and weaker GRMs.
Why are Nifty returns looking so tepid?
The big question is when so many sectors, including banks, have done so well, why is the Nifty up by just 2.57%. Remember, the 3 sectors that gave negative returns in August; Oil, FMCG and IT are heavyweights in the Nifty. Between them; the 3 sectors account for nearly 60% of the weightage on the Nifty and that makes their impact significant. It is clearly the weight of the negative return sectors that has kept the Nifty tepid in August 2020. September could be a lot more decisive for the Nifty.