The year 2020-21 was the most challenging year for human kind in a long time. Never before in a lifetime we had to worry as much about the lives and livelihoods of many of our loved ones. The year had important lessons for many walks of life.
With respect to economy, recovery in the economy was much faster than anticipated. The stock markets have risen even faster!! The relentless rise in markets has caught everyone by surprise – low interest rates and strong liquidity has meant a lot of money is chasing very few assets.
In Jan-March 2021 quarter, prospects of strong global recovery (as reflected by various high frequency indicators), mass vaccination drive, sustained policy support from US government and central banks of developed economies along with improved global economic outlook have aided the gains in equity markets.
The global economy is expected to grow at 5.6% in 2021-22 as per World Bank Projections. This is the fastest post-recession pace in 80 years. Among the major economies USA is expected to grow at 6.8% whereas China is expected to report 8.5% growth.
Amid corona pandemic, India’s GDP grew at 1.6% in the Jan-March 2021 quarter but witnessed a contraction of 7.3% for entire fiscal year. This is the first full year contraction in the Indian economy in the last 4 decades since 1979-80 when GDP had shrunk by 5.2%.
Meanwhile, the 2nd wave of coronavirus infections and deaths across world’s 2nd hardest hit country has caused forecasters to trim their projections for the GDP for current fiscal year. However, RBI Monetary Policy Committee has retained its GDP growth projection at 10.5% for the current fiscal year 2021-22.
India stock markets have remained resilient over the past few months despite the on-going COVID crisis.
Major reasons for positive investor sentiment are as follows:-
- Good Q4’21 earnings season along with strong management commentary giving belief to investors to look beyond the 2nd COVID wave.
- Even though the country faced bigger health crisis than 2020, it seems the economic damage has been lower than 2020 when everything came to a standstill due to nationwide lockdown.
- With recent improvement in pace of vaccination along with 2nd wave largely coming under control, there are expectations of strong rebound from Q2’22.
Likelihood of 3rd wave of corona virus, tightening of global financial conditions due to inflationary concerns and uptick in US treasury yields are some of the key risks which can derail the India stock market.
The last quarter of a challenging and pandemic-hit fiscal FY21 has been absolutely dazzling for the corporate sector having registered double-digit growth in the top-line and more than 6-times jump in net profits (YoY). Although one can argue that the year-on-year performance is relatively skewed due to low-base but importantly, there has been a sequential improvement of 9.6% in net sales and almost 30% growth in net profits in Q4-FY21. Additionally, annual numbers for FY21 are also very impressive with net sales being lower by only 1.5% vs FY20 whereas net profits have registered a growth of 60.2% vs last year mainly led by cost rationalization measures.
Many sectors like Metals, Power, Cement, Auto & Auto Ancillary, Consumer Durables, IT, Pharma, Chemicals, Real Estate, Textiles, Building Materials and Oil & Gas continue to do very well whereas industries like Travel & Tourism, Retail, Airlines, Hotels, Restaurants, Paper etc. continue to be severely impacted by COVID.
Two key changes over the last 4-5 months have helped us to become one of the best performing PMS for over the last 2-3 months
- Skew towards Mid-Caps and Small-Caps (more than 75% of our portfolio excluding cash) which have done exceedingly well (30% returns for BSE Small-Cap Index vs ~9% returns for Sensex over Jan to May 2021).
- All our top holdings did exceedingly well. Also, we were very rightly placed in terms of where all the action was going on (commodity stocks/cyclical sectors – rice, sugar, coffee, metals, chemicals, paper, fertilizer, textiles, power etc.)
Out of a universe of 1419 stocks on NSE above Rs 5 as of June 2018, 64% of the stocks are still below their 2018 highs; 48% of the stocks are still 25% or more below 2018 highs and 28% of the stocks are still 50% or more below 2018 highs which. This makes us believe that the current bull market is still very young but it will have its share of ups and downs.
Also, with the kind of move that is happening in multiple stocks especially in small and mid cap space; the market can be considered as a bit overheated and in these times, its best to remain stock specific and valuation centric approach. With a super recouping that began in April 2020 and the super rally that continued till June 2021; we should be prepared for a bit of volatility.
We would like to end the update with the following quote:
“The real fortunes in the country have been made by people who have been right about the business they invest in and not right about the timing of the stock market.” – Warren Buffett
