Hypotheses are framed based on trends, and stock markets need not necessarily follow those trends to a certainty. Quoting Wikipedia, ‘January Effect’ is a hypothesis, that there is a seasonal anomaly in the financial market, where securities' prices increase in the month of January more than in any other month. This calendar effect would create an opportunity for investors to buy stocks for lower prices before January and sell them after their value increases. As with all calendar effects, if true, it would suggest that the market is not efficient, as market efficiency would suggest that this effect should disappear. This effect was first observed around 1942 by investment banker Sidney B. Wachtel. It could be applicable to some markets or during some years, but a majority of them didn’t follow the hypothesis this time around.
The vaccination drive and improving economic indicators provided the necessary impetus to expectations of better than expected GDP numbers. The US small-cap 2000, Tel Aviv 35 Index and the Karachi 100 did follow the hypothesis and returned more than the 2.4% average of positive returning indices. Indian indices – Sensex 30 and Nifty 50, on the other hand, after having a tremendous up move in the previous 3 months took a break, with jitters due to unfounded presumptions of negative effects of Union Budget 2021. Sensex lost 3.1%, while Nifty lost 2.5%.
A capture of Nifty 50 daily movement shows that the last week of January was a big sell week, ahead of the Budget on 01 Feb 2021. The impressive gains in the earlier part of the month were wiped out completely, resulting in Nifty 50 index losing 2.5%.
Among various Nifty Indices, Nifty Auto had a decent month, delivering a 6.7% return in January, followed by Nifty PSU Bank at 3.5% and Nifty Midcap 50 at 2.2%, trailed by Nifty IT and Nifty Small cap. On the losing end, there were lots of indices – Nifty Pharma was the biggest loser at 5.8%, closely followed by Nifty Metal at 5.4% and Nifty Energy at 4.5%.
Among Nifty50 companies, Tata Motors was the blockbuster stock of the month with a very impressive 42.9% return, followed by UPL at 20.02% and Bajaj Auto at 16.3%. Kotak Mahindra Bank, Asian Paints, Divis Laboratories, and Titan were among the larger losers.
For the three-month period ending January, Tata Motors delivered a mind-boggling98% return, with the next best return by Bajaj Finserv at 56.5%.On a 1-year trailing basis, Cipla stood out, with an 84.8% return, ably supported by Divis Laboratories at 72.6%.
Gush of liquidity due to aggressive monetary policies across western nations resulted in continued FII inflow momentum from the previous month. FIIs, after putting in Rs. 21,700 crores in the first 3 weeks, withdrew Rs. 12,732 crores in a matter of 5 days. However, for the month, the FII net flows were positive at Rs.8980 crores. DIIs on the other hand, continued their selling spree, ending the month with a net outflow of Rs. 11,970 crores.
Since 01 October, FIIs have pumped in Rs. 1.37 lakh crore, while DIIs have withdrawn a sum of Rs. 1.15 lakh crore. Nifty 50 however was positive in 3 of the 4 months, buoyed by these inflows.
Consequent to stock market’s subdued performance, BSE equity market capitalization trended lower, losing close to Rs.1.91 lakh crore, to end at Rs. 186.1 lakh crore by month-end.
In currency, INR appreciated by 0.22% versus the dollar to end at 72.877. RBI’s intervention in the foreign exchange market kept the rupee in the 73.5-72.9 INR/US$ range.
India’s foreign exchange reserves rose by US$9.3 billion in January, to end at US$590.2 billion. For 2020, RBI added a total of US$123.3 billion, providing import cover of around 17+ months.
Barring gold, zinc, palladium, and coffee, prices of most commodities moved up in January. After hitting theUS$2000-mark, gold has been trending down and lower in recent weeks. Since end of October, many central banks reduced their holdings while retail and institutional investors sold gold ETFs, to invest in equities.
With vaccination drive in progress across most nations, and economies showing signs of recovery, gold as an asset class has taken a backseat for the time being. After many months, gold prices in India tended lower convincingly below the Rs. 50,000 per 10 gram mark.
Between 29 December 2020 and 29 January 2021, gold lost 1.67% in comparison to Nifty 50 losing 2.74%.
On the economic front, quite a few highlights that put focus on the recovery and were reflected in the Union Budget 2021 presented by finance minister Mrs. Nirmala Sitharaman. The CSO (Central Statistics Office) has estimated India’s real GDP growth for FY21 at -7.7% vs. 4.2% growth in the previous fiscal, marking the first annual contraction in last four decades and the steepest since independence. This is primarily led by a huge contraction in investment and private consumption, partly offset by a decent growth in government spending and trade surplus. This implies a modest decline of 0.1% in GDP growth in H2FY21—a significant improvement from a 15.7% drop in the first half. The nominal GDP for FY21 is expected to shrink by 4.2% to Rs194.8trn— nearly 13.4% short of the FY21 budget estimate.
Even as H2 recovery is expected to be broad-based, the biggest growth driver is likely to be government consumption, supported to an extent by recovery in Indian corporate earnings. Government Final Consumption Expenditure (GFCE) is expected to grow at a strong 17% YoY in H2FY21 vs. a 3.9% contraction the first half. Finance Minister informed a further borrowing of Rs. 80,000 crores for the year FY21. Government had already borrowing Rs. 12 lakh crores to meet budgetary requirements, and for emergency spending as part of Covid-19 response.
As I write this newsletter, the budget has been presented, RBI latest monetary policy has been announced and stock market has rebounded tremendously from the lows witnessed in the last week of January. An update of all these changes is provided to stay on-track of the current situation.
RBI Monetary Policy:
Post the Monetary Policy Committee (MPC) meeting, the highlights announced were:
- Policy repo rate at 4%, Reverse repo rate at 3.35%, Marginal standing facility and Bank rate at 4.25% to continue.
- FY22 GDP projected at 10.5%, and CPI inflation projected at 5.2% for Q1CY21 is expected to come down to 4.3% by H2CY21.
- Reserve money rose by 14.5% on a YoY basis
- Two Phase normalization of CRR (currently at 3%); to increase to 3.5% by March and to 4% by May; MSF relaxation was extended for 6 more months; HTM limits to be restored from Jun 2023
Union Budget 2021 – Summary:
The finance minister delivered a very good budget for a resurgent India, addressing the anaemic economic growth of the last few years. This year, most budgetary allocations are focussed towards capital expenditure and asset creation rather than simple expenditure. Allocation to health, infrastructure – roads, railways, ports and industrials was commendable. A stable & simplified tax regime and a strong push for growth are the defining characters of this budget. it is important to treat this as a ‘Rebuilding India – Post Covid Budget’ and not as any other generic budget.
Finance Minister has reiterated the administration’s commitment of Rs.1.97 lakh crore in next 5 years starting FY2021-22 to manufacturing, through 13 Production Linked Incentive (PLI) schemes. The alarming part of the budget notes was the 9.5% fiscal deficit, with gross borrowing of Rs. 12 lakh crores done already, and Rs.80,000 crore of borrowing still to follow. Though this is understandable, coming in a pandemic hit year, the bond market could see some impact, with a possible rise in yields. A disappointment for not providing any possible relief to individual tax payers, and Provident Fund contributions above Rs 2.5lakh a year being made taxable at normal rates will not go down well with ordinary tax payers.
Economy facing sectors like cement, steel, power catering to the infrastructure segment (a 37% increase in budget) would be the largest beneficiaries. The outlay for the roads sector has been increased from Rs.91,000 crore to 1.18 lakh crore. With a large capex, focussed more on asset creation, government has provided the necessary impetus for a stronger economic growth in the upcoming year. The extension of tax holiday for affordable housing segment should benefit realty companies catering to this segment. Initiatives such as Jal Jeevan Mission (400% increase) for universal water supply and Urban Swachh Bharat Mission with a large outlay should help piping, environment related, water, and waste management companies. Health sector with an outlay of more than Rs. 2.23 lakh crore (138% increase) would bring focus to hospitals and pharma companies providing products and services to primary and tertiary care. The vehicle scrappage policy, which has been in the making for a very long time, will support auto sector growth.
While the divestment target of Rs. 1.75 lakh crore seems steep at this point, it is achievable, provided, government unveils a feasible road map with clear deadlines to prospective investors. A few divestments like Bharat Petroleum Corporation Limited, Container Corporation of India, Bharat Earth Movers Limited, Shipping Corporation of India are already announced and underway. LIC IPO would be the behemoth task in front of the government. The finance minister has made a subtle policy change, rewording divestment as privatization and this augurs well for aspiring investors bidding for these assets and companies.
Links to the:
- full budget speech of Finance Minister: https://www.indiabudget.gov.in/doc/Budget_Speech.pdf
- Budget Highlights and key features in images: https://www.indiabudget.gov.in/doc/bh1.pdf
- India’s annual financial statement: https://www.indiabudget.gov.in/doc/AFS/allafs.pdf
- Ministry wise allocation in budget: https://www.indiabudget.gov.in/doc/eb/sumsbe.pdf
The following table by CRISIL analyzes the impact of the budget on FY 22 growth prospects, by assessing the impact of various components on demand.
There are many beneficiaries of the budget proposals – Autos & vehicle financiers, Healthcare, Insurance, Infrastructure companies involved in – construction, railways, ports, power distribution, roads and urban transport, along with private banks, REITS and InvIT’s. Electronic goods manufacturers, consumer discretionary and textile companies are also expected to be some of the larger beneficiaries.
Disappointment due to lower customs duty on iron and steel sector could impact steel companies while introduction of agri infra cess of 100% on alcoholic beverages comes as a negative surprise for spirit manufacturers.
While budget has brought most of the old economy facing sectors into focus, it is still the responsibility of each investor to rebalance their individual portfolios, taking valuations and growth prospects into account. It is also essential to remember that capex isn’t done overnight and assets don’t get created in a matter of days. With that thought in mind, coupled with the present euphoria in stock markets, it is necessary to rebalance the portfolio smartly, based on expected earnings growth.
As IT and Pharma continue to remain in portfolio albeit at a lower weight post their excellent run over the last 1 year, infrastructure and realty sectors can be introduced at a smaller allocation. Banking, financial services and insurance will continue to rule the roost at the highest allocation in the portfolio. However, it is essential to avoid banks with higher proforma NPAs, as situation could become tougher post March quarter results.
Quality will still be the order of the day for investing. Sectors would be BFSI, IT, Pharma, Metals, along with Realty, Infrastructure and Industrials as a basket allocation. Earnings upgrades will continue in the coming quarters, and investors are advised to invest with a systematic approach. Earnings season is on in full swing and many companies have declared their results already.
A look at the top 30 companies by market capitalization, declaring their third quarter earnings.
What does February hold for Indian stock markets?
Over the past 12 years, Nifty 50 registered negative returns on 7 occasions due to various reasons. Notions of richly valued markets and worries of impending Union Budget were dashed out immediately in the first week of February. After hitting a low of 13,662.45, Nifty 50 bounced back sharply to end the week at 14,924.25, a rise of 9.46%. Both Sensex 30 and Nifty 50 have hit new all-time highs in recent times – 51,073.27 and 15,014.65 respectively.
It bodes well for every investor to reconfirm the strength of their portfolio, valuations of stocks in that portfolio and make necessary changes, to incorporate emerging and favored sectors from budget proposals and undervalued sectors, if any. Hopefully, the negative effects of corona virus pandemic are behind us, and our government starts enforcing the capex spending outlined in the budget.
With varied assumptions for FY22 GDP growth, there could be some overestimation as well as underestimation, but that would be known only when the time comes. Whichever the case may be, the low base of previous quarters bodes well for a strong double-digit GDP number and a good chance of Nifty 50 earnings ending up around the Rs. 700 mark for FY22. Let’s hope for the best.
FYERS Research will provide quarterly results update of top 750 companies on FYERS Community space at:
https://community.fyers.in/topic/q3fy21-financial-results
Stay healthy and stay safe.
Happy Trading & Investing!