If stock market predictions were easy, everyone would be a successful astrologer. This July, the stock market continued its previous month’s performance, with a stunning 7.63% gain, the second-best July performance in 12 yrs. Of the 5974 BSE listed stocks, 1170 stocks gave positive returns, of which 20 stocks clocked greater than 100% gains, while 80 stocks ended up with gains ranging between 50% and 100%. If we consider Nifty 50 return as an average, then 453 stocks have outperformed Nifty 50 during this month. Retail investors are having a gala at the expense of institutional investors, with their (Retail) participation increasing dramatically. It’s a trader and an investor’s paradise out there.
However, on the corona virus pandemic front, situation hasn’t abated at all and as predicted, has taken a giant leap in terms of daily cases recorded. New cases were crossing the 25,000 mark at the beginning of July and as of Aug 8th, hit the 60,000 mark. The spike in the last one week has been of 60,971 cases, while the increase in the number of infections in the week before that was 47,352. The virus is not going anywhere, till a vaccine is found and currently, phase II and III trials are underway across companies and continents. The race is on; till then we have to safe guard our health on our own.
Coming back to stock markets, it was a rip-roaring time for a few indices while many others under performed for the month. Surprisingly, Karachi 100 delivered a superlative 12.24%, closely followed by SZSE Component Index, which tracks the 500 largest stocks traded on the Shenzhen Stock Exchange, at 11.15%.
Indian Indices weren’t far too behind, with Nifty 50 and Nifty Small Cap delivering good returns. But it was the sectoral indices which did exceedingly well. Led by Nifty IT at a mind boggling 22.5% returns for the month, pharma, auto and metal indices returned anywhere between 7.8% and 11.7%. Realty, PSU banks and media were the under performing sectors.
The exemplary performance of the IT index was evident from the fact that, 4 out of the top 5 stocks from Nifty 50 were from the IT sector. Infosys led with 30+% gains, while Wipro, HCL Technologies and Tech Mahindra crossed the 25% mark. FMCG, banks and media related companies were subdued owing to various reasons.
On a provisional basis, FII and DII participation was muted, with DIIs selling a net of Rs. 10,000 cr., a considerable outflow in recent times. Similar to last month, FII outflows were witnessed in 10 out of the 23 trading sessions of the month, while DII flows were positive only on 5 trading days. Retail investors seem to be holding the bulk of the market up, which was evident from the broad-based participation & rally of stocks from the mid and small cap segments.
This prompted an increase of Rs.7.98 lakh crore in BSE equity market capitalization, though comparatively lesser than the Rs.12.09 lakh crore witnessed in the previous month.
USD-INR was stable for most of the month, ranging between Rs.75.55 to Rs.74.92 to the dollar.
Foreign exchange reserves jumped by US$27.73 bn, to end the month at US$534.56 bn.
In other news, Reliance Industries added two more marquee investors to its portfolio of Jio Platform stake holders, with Qualcomm and the biggest of all, Google joining in with a US$4.5 bn investment for a 7.73% stake. The Annual General Meeting (AGM) was eventful, with shareholders cheering in the new investors, and appreciating the earlier commitment of Mukesh Ambani to make Reliance “Net Debt Free” before the AGM.
While Reliance Industries, accompanied by pharma, metal and auto stocks were pushing the equity markets up, precious metals including gold, silver were screaming through their multi-year or life time highs. Gold returned 9.43% for the month while Silver returned an astonishing 29.5%.
In a comparison between Gold and Nifty on a historical basis, the former gave positive returns in 12 out of the 15 years under consideration. With developed economies continuing to print sufficient currency, gold broke its historic high of US$1921/oz and hit a new life high of US$2077.85/oz. This run is expected to continue for some more time, albeit with a few corrections on the way.
Similar was the case with silver, platinum, copper and many other commodities. As of Aug 09, their performances stood as follows:
While stock markets and commodities are racing to their highs, the economic news isn’t really exciting. Though fundamentals don’t justify the rise in stock prices of many companies, with plentiful liquidity, the situation isn’t changing at the moment. Consumer Price Index (CPI) inflation for June 2020 stood at 6.09% YoY, much above the Reserve Bank of India’s (RBI) target band of 4%.Federation of Indian Chambers of Commerce & Industry (FICCI) in its economic outlook survey has projected the India's annual median GDP growth for FY21 at (-) 4.5% YoY, compared to an earlier growth estimate of 5.5% YoY. On the other hand, ICRA has sharply revised its GDP forecast downward to (-)9.5% YoY for FY21 from its earlier assessment of(-) 5% YoY.
The Central Government has issued guidelines for unlock III. In the third phase of lifting restrictions, night curfew was removed from August 1 and Yoga centers and gymnasiums were allowed to operate from August 5. However, metro rail services, cinema halls, swimming pools, entertainment parks, theaters, bars and auditoriums continue to remain shut as per the earlier guidelines.
A few economic parameters which are showing green shoots, especially in the agriculture sector.
- Ministry of Agriculture and Farmers Welfare(MoA&FW) shared that kharif crops in the crop year 2020-21 have been sown in 79.995 mn hectares until July 24, 2020, which is 12.488 mn hectare or 18.5% higher as compared to the same period last year.
- India Meteorological Department (IMD) has informed that, seasonal cumulative rainfall during current year’s southwest monsoon season upto July 22, 2020 was 388.6 mm, which was 6% higher than long period average.
- India’s overall exports (Merchandise and Services combined) in April-June 2020-21 are estimated to be USD 101.02 bn, exhibiting a negative growth of (-) 25.92% over the same period last year. Overall imports in April-June 2020-21 are estimated to be USD 89.31 bn, exhibiting a negative growth of (-) 45.1% over the same period last year.
But distressing signals do exist and are a cause of worry to investors, especially in the banking and financial space, followed by housing segment.
- RBI forecasts that the gross non-performing assets (GNPA) ratio of the India's scheduled commercial banks (SCBs) may increase from 8.5% in March 2020 to 12.5% by the same period next year, under the baseline scenario. This ratio could, soar to 14.7% under severe economic stress (Source: HDFC Bank Insights).
- As per Ministry of Statistics & Programme Implementation (MOSPI), Index of Industrial Production (IIP) contracted by a record 34.7% YoY in May 2020, compared to a revised contraction of 57.6% YoY in April 2020.
- Centre for Monitoring Indian Economy (CMIE) shared that the rural unemployment rate climbed to 7.66% for the week ended July 26, 2020, as against the 7.1% reported in the week to July 19, 2020. The national unemployment rate also inched up to 8.21% in the week ended July 26, 2020 as against 7.94% in the week to July 19, 2020.
- PropTiger reported that housing sales plunged by 79% YoY to 19,038 units across eight major cities in April-June quarter of 2020, as demand was badly impacted due to the nationwide lockdown to contain Covid-19 pandemic.
Amid these issues, India Inc commenced the announcement of their first quarter results for FY21 and a large section of the companies hasn’t really showcased any noteworthy results, barring a few here and there. A look at the Q1FY21 financial performance of the mega cap companies doesn’t indicate any encouraging results. (Data as of Aug 07 2020)
Among the next set of companies with market cap between Rs.40,000 crore and Rs. 100,000 crore, only FMCG and pharma related firms have shown resilience. (Data as of Aug 07 2020)
Concluding, stock markets and economy are delinked and have been for the last couple of years. With corona virus pandemic at its peak in India now, it is extremely difficult to suggest an appropriate timeline for economic recovery. Most rating agencies and analysts have accepted FY21 as a washout year for earnings and growth. Now, expectations are on the commercial availability of vaccine to the general masses, so as to calm unusual fear of infection and to restore normalcy among citizens.
Since Aug 2010, the performance of stock market in Aug has been zig-zag, with Nifty 50 ending in the positive every alternate year and negative like wise. In August 2019, Nifty 50 recorded a flat return of (-)0.85%, and a positive return of 2.85% in the year before.
As Alan Greenspan, Former Chair of the Federal Reserve of the United States said, “ I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about”. Let’s hope those words ring true in the Indian scenario too…
Till then, stay healthy and stay safe.
Happy Trading & Investing!