The (+3.51%) bounce in the Nifty in October was expected after a negative performance in September. However, Nifty was highly volatile in the month of October despite VIX staying in the range of 20-22. This was caused by global factors like the US electoral uncertainty and the recent bouts of ETF selling in Indian market. It is estimated that India dedicated ETFs and GEM ETFs withdrew $10.8 billion from India but many long-only funds also saw Indian markets as a safe haven in the midst of the US elections.
Don’t miss the diverse trend in the Nifty and the mid cap index
September saw negative returns after five months of positive returns. However, October was a return to positive performance. Here are some key highlights of October 2020.
• Prima facie, it looks like the large cap Nifty index outperformed as it appreciated by 3.51% as against just 0.20% for the Nifty Mid Cap. However, that would be too simplistic a conclusion. Scratch the surface and there actually was a divergent trend.
• Through the month of October, the Nifty made several attempts to breach the 12,000 mark but as the chart above shows, it failed to sustain above that level despite crossing that level in intraday trades. Volatility was a feature of the large caps.
• The mid cap index, while displaying a slightly negative close, bounced back sharply from lower levels of 6300 on the Nifty Mid-Cap 150 index. While the Nifty was up against a resistance, the mid caps took support during the month and recouped most of its losses.
• At a macro level, it was the monetary policy that set the trend for the month. While the Monetary Policy Committee held the repo rates at 4%, the MPC agreed to keep the stance of policy accommodative, all the way through 2021.
• One of the biggest positive triggers from the monetary policy stance was visible in the private banks, which gained more than 12.2% due to the accommodative stance and with their weight managed to pull the Nifty up overall in the month of October 2020.
Private banks and IT flattered the street in Oct-20
The Nifty ended Oct-20 with positive returns of +3.51%. If there was one sector that triggered this rally, it was private banks with a 12.2% rally. Most heavyweights including HDFC Bank, ICICI Bank and Kotak Bank participated. In all these cases, the rally was on expectations of solid results and the banks did not let them down.
The other heavyweight sector that boosted the Nifty during the month was the IT sector that gained over 4.84%. Of course, the IT gains could have been much higher had it not been for the sell-off in IT stocks towards the end of the month. Even metals gained over 4.51% on the back of hopes that the US stimulus would catalyze higher better metal prices. Demand from China and domestic steel demand have been buoyant.
Overall, the theme for the month appears to be “long on rate sensitives” on hopes that any yield spike was unlikely for now. That also explains why the realty index rallied by 7.7% during the month as greenshoots of recovery in residential demand appeared. Of course, its weight in the Nifty is not significant.
Pharma, oil, auto and FMCG pull down the Nifty
One of the traditional favourites, Pharma, turned the worst performance. After an unreal rally in pharma stocks since March, there was some reality returning to pharma valuations. Oil could have done better but there were concerns over gross refining margins at Reliance. Also, the Future group deal hit a roadblock after Amazon got a stay from the Singapore arbitrator. That did not help sentiments on RIL.
FMCG results have been good so far but the demand push appears to be coming from the rural side. Urban demand is still tepid and fears of a relapse of COVID are only worsening matters. The demand story put pressure on autos too. Despite an accommodative stance, PSU banks were under pressure due to asset quality concerns.
What will be the big story on the Nifty for November?
With the monetary stance clearly accommodative, the focus now shifts to the fundamental issues like Q2 GDP, IIP growth and inflation. But the good news is that the quarterly numbers for the Sep-20 quarter have shown a sharp bounce from the Jun-20 quarter. To paraphrase an optimist, “The best may not be on yet, but the worst surely seems to be over for the Indian economy”. Hopefully, that should propel the markets higher!