The rollercoaster ride of 2021 seems to be taking a pleasant turn given India’s second Covid wave peaked and rolled over in early May and new cases declined to less than 1 lac. This is the result of combined efforts of states through local restrictions and vaccination drive from the centre.
India has vaccinated ~ 14% of its population so far and the domestic vaccine production is expected to increase by the end of June. SII and Bharat Biotech are expected to ramp up their vaccine production, & Biological E might join this bandwagon soon. Assuming India administers ~ 4mn shots/day post-June (2.5mn until), we estimate ~60% of the population above 18 yrs could receive at least one shot by the end of 2021 & ~48% could receive both shots.
Through this challenging period, Indian equity markets strengthened further touching another high in the month of May with Mid-caps and Small-caps outperforming the large-caps. All sector indices performed well, with Power, Capital Goods, and Oil & Gas sectors leading the out-performance. MSCI India saw a strong outperformance vs. its peers MSCI EM/MSCI AP X Japan.
Along with factors like declining Covid cases, pick up in vaccination drive, ease of lockdown like restrictions in some areas, several other key developments kept the equity markets buoyant last month,
RBI unveiled a series of liquidity measures to help banks support the healthcare infrastructure and small borrowers impacted by Covid.
Surging commodity prices signalling an uptick in Inflation.
USA’s $6 tn budget proposal fuelled by higher taxes.
India’s GDP contracted 7.3% vs. an increase of 4% in FY2020.
Net profits of 46 companies in Nifty-50 increased 156% YoY and 5.6% QoQ.
FPIs bought US$37 mn of Indian equities while DIIs bought US$283 mn.
Favourable macros - CPI inflation moderated to 4.29% in April vs 5.52% in March. March IIP rose by 22.4% vs -3.4% in February 2021. WPI inflation came in at 10.5% in April vs 7.4% in March.
India saw downgrading of FY2022 GDP forecast by several rating agencies. World Bank expects India’s GDP to grow 8.3% in FY 2022 and 7.5% in FY 2023.
Global equities too traded higher with Europe leading the other developed markets. Global growth continued to inch up led by DM households, reflecting large US fiscal support and the activation of pent-up demand. Performance going forward shall depend on supply catching up with growing demand and progress of vaccination in EMs.
View on the Markets:
Global market capitalization has increased ~30% since the start of the pandemic while global GDP is down. Central banks seem hesitant to ‘exit’ from their ultra-loose monetary policies perhaps fearing ‘taper tantrum’. Bond markets are also not reacting to the increasing inflation prints. Higher inflation in the current subdued economic environment would impact real incomes of low-income groups & can have a lag effect on equities.
Retail activity continues to remain elevated in global stock markets. We certainly don’t remember when this frenzy for stocks happened by retail investors. So far their experience seems to be good with markets going strength to strength, market breadth improving and volatility indices collapsing post discovery of Covid. Though there is not much study on the behavioural pattern of how retail invests but we know for the fact that the market is a slave of earnings and the longevity of a business is most important in this ever changing world. Stories do matter, but only in short term. Ultimately stocks have to get aligned with fundamentals over the medium to long term.
Customers First- we saw commodities rally and commodity stocks did really well in the recent past whereas users took a back seat. There is one golden rule of business that is ‘Customers first’. Users of commodities are likely to benefit next and more importantly companies with pricing power or high MOATS among them.
With global economic activity picking pace the crude oil might firm up in the short term & the ESG themes on energy might tail off. Activity around EVs, Solar energy may be relatively benign as huge demand for transportation post opening of trade and infra spend can only be met through conventional sources of energy.
Life post-Covid will give rise to differential themes and sectors that could lead the growth in equity markets. Such growth may happen in the tourism sector as travel for pleasure can see an exponential rise. Secondly, healthcare expenditure is likely to remain elevated in the near future. Women workforce is likely to increase with the acceptance of work from home and the rise of cloud kitchen models potentially inviting organized players. Additionally, Covid fast-tracked digitization in areas like Education, Business, Shopping, Work-from-Home, etc is likely to show an enormous impact on businesses in the coming years. The Big Billion Dollar IPO filing by Unicorns will only increase going ahead. Automation, Artificial Intelligence, and Technology can make or break business models in the future.
We have tried to play these themes through few companies in our portfolio and will endeavour to uncover a few more. We advise investors to remain focused rather than get lured by the momentum. Even as the market levels seem elevated, the valuations look reasonable for quality companies benefitting out of Post- Covid themes in the coming years.
Our funds continue to be well diversified with significant exposure to beneficiaries of Work from Home, Healthcare, Automation, Financials, Agriculture, Production Linked Incentive (PLI) Scheme, etc. and are well positioned for a recovery in the economy. The quality aspect of our portfolio should stand us in good stead. Our focus continues to be on sector leaders with clean management and unlevered balance sheets as they provide both growth and stability in the long run and are set to emerge stronger in the current environment.
Source: ABSLAMC Dealing, ABSLAMC Investment Research
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