The (-1.23%) fall in the Nifty in September was not entirely unexpected. However, it must be said that, had it not been for the third week, when the Sensex lost 2800 points in 6 trading sessions, the monthly performance would have certainly been better.
Key trends visible in the month of Sep-20
After 5 months of consistent positive returns, the Nifty slipped into negative territory in September. Some key trends were visible in market performance.
• Mid caps managed to outperform large caps while small caps did still better during Sep-20. With the Nifty getting closer to previous highs and large caps at premium valuations, investors were looking for alpha in mid and small caps.
• The GDP contraction of -23.9% for the Jun-20 quarter proved to be a dampener in Sep-20. To add to the damage, most of the global rating agencies and research houses have downgraded full year GDP contraction for FY21 to (-11%).
• Even as the border situation with China appeared to improve, there was a new risk for Indian markets from resurgence in Coronavirus cases. This trend was evident across the US, Europe and India.
• The sustained higher levels of CPI inflation despite weak output growth clearly hinted at disruptions in agricultural and industrial supply chains. That has ruled out rate cuts in the year 2020, putting further pressure on rate sensitives.
• Another big trend in September was the return of the IPO juggernaut. IPOs like Happiest Minds, Route Mobile, CAMS and Chemcon not only got heavily oversubscribed but also listed with more than 100% gains.
Pharma and IT continued to flatter markets in Sep-20
The Nifty ended Sep-20 with negative returns of (-1.23%). It could have been worse, had it not been for the bounce in the last week of September. However, HNIs and institutions gravitated towards smaller stocks in search of Alpha.
The star sectors in Sep-20 were Pharma, IT and consumer durables. In fact, consumer durables gained as businesses opened up and there was resurgence in demand. The other two major gainers were pharma and IT. Apart from being defensives in a tough market, they had other factors favouring them.
The IT sector is expected to benefit in a big way from the aggressive $2.4 trillion stimulus planned by Trump. That is likely to positively impact IT spending among US corporates. Pharma stocks also gained as a number of companies got closer to putting their stamp on a Coronavirus vaccine. The API and CRAMS story is also working to India’s favour. IT and Pharma also gained from dollar strength during Sep-20.
Rate sensitives and metalstake it on their chin
The big losses during the month were seen in the rate sensitive sectors like banks, financials and realty. Metals and hydrocarbons also took deep cuts during the month. The reasons for the weakness in banks were fairly straightforward. Firstly, the detailed investigation by the US Treasury has identified a number of Indian banks involved in money laundering. That has not gone down well with the markets. Secondly, higher fiscal deficit means the yields will remain above the 6% mark and bond prices could come under pressure. That is not good news for banks or realty stocks.
Among the other sectors that strained the markets in Sep-20, metals gave up some of their gains of August. There was a lot of euphoria built up around export demand for metals from China and Vietnam, but that has apparently saturated. Oil & gas was another sector to take deep cuts. Heavyweight RIL appears to be stagnating even as low Brent Crude prices at $40/bbl have put pressure on oil production and refining stocks. FMCG stocks witnessed pressure on volume growth and pricing power.
Nifty could be finally poised with positive macros
As the Nifty enters October, the trading could be driven a lot more by macro data flows. Some of the data flows have been really positive. While infrastructure sector has continued to contract, we are seeing consistent upward revisions. The current account showed a surplus of $19.8 billion for the Jun-20 quarter, a figure unprecedented in Indian economic history. In the Mar-20 quarter, the current account had turned from deficit to surplus after a gap of 13 years.
There are worries on the fiscal front with fiscal deficit likely to double from 3.5% to over 7% for FY21. In the Jun-20 quarter, India was the worst performing economy among the top-20 economies. The positive takeaway is that the bad news is factored in and the good news is not. That should give hope for the Nifty in Oct-20!