India has kicked off 2021 with elevated enthusiasm as benchmark indices in Nifty and Sensex crossed and re-crossed the 15,000 and 50,000 milestones. Now helmed as the 7th largest stock market worldwide, Indian equities overtook Canada, Germany and Saudi Arabia, recording a total market-cap of $2.7 trillion.
Indian equities have delivered returns, tensions, more returns and more tensions by seeing wild swings on the upside and downside. The present positives are being met with future uncertainties, leading to markets giving mixed signals.
In an attempt to address these queries, this blog dissects the current market movements into 4 as-simple-as-informative graphs. Highlighting observations, here is what the markets have to ‘Signal’, and how you can make the most of it.
Graph 1 – The Return Reckoner
Observations:
- The viral virus of Covid-19 pushed India and world into socio-economic lockdowns. India’s govt. organized one of the largest relief packages worldwide to anchor India as global growth engine in post-covid world
- Markets rallied 80%+ since march lows, with gains being heavily polarized to large-cap stocks. Heavy buying pushed index’s P/E ratio to 36.57 vs long-term avg of ~24. With valuations stretched, and ample flows, investors are looking elsewhere to invest. The backdrop makes mid-&-small cap index companies an exciting opportunity for investors over the next 5 years
- The mid-&-small cap segments have given comforted returns over the last 3 years. Govt. MSME plans, supportive valuations (PE contraction of 50% from 2017 peaks), and Multi-cap MF regulation change, are set to bring in flows into these segments.
In fact, over the last 5 years, mid-&-small caps have greatly out-performed large-caps, as the former have seen 78 & 117 companies report growth vs 68 in the latter
Graph 2 – The Market-Cap Wedge
Observations:
- As observed, post the 2018 market fall, the market rally was particularly narrow and was led majorly by growth stocks. Going forward, the market rally is expected to be broader, courtesy of expansionary policy measures by global central banks, and other covid solution practice
- To put it simply, most of the market growth that we see today has come from a handful of stocks in adhering to the “big gets bigger” principle. As we near the exhaustion of the too-big-to-fail syndicates, Indian markets will expectedly fall on the performances of the mid, small and micro institutions. Wider inclusion across market-caps will not only reduce dichotomy between markets and economy fundamentals but also reflect true health & wealth of the sync between them
- The fact in growth being pegged to sans-large indices is clearly reflected in figures of the remaining muted market-caps, in their evolution of garnering relevant investor attention
Graph 3 – Championing Cross Market-Cap Portfolio
Observations:
- 2020 markets saw mini bouts for particular asset classes contingent on developments and un-developments. The call for asset allocation stood ground when extremes in allocations became widely visible. Tailored, actively managed, rightly allocated portfolios made the best of markets in up and down trends by systematically managing portfolio exposures
- Investors who were diversified across market-caps in their portfolios saw stronger performance vis-à-vis Large-cap MFs and broader markets. In numbers, following were the calendar-year results:
- Portfolio delivered absolute return of 23.0%
- Portfolio delivered alpha of 3.2% vs Large-Cap fund
- Portfolio delivered alpha of 8.2% vs broader market index
Graph 4 – Sectoral Salutes
Observations:
- The covid phenomenon changed face and value of sectoral outlooks with immediate needs calling for immediate actions. Recognized as the biggest health crisis of the last century, it gave impetus to health & IT sectors, as the health of the 2 factions were key in determining the wealth of the self and surroundings. The imposed lock-downs called for halting activities in manufacturing, productions and service-oriented market sectors. As an example, Auto sales recorded 0 automobiles sold in April 2019, for the 1st time in recorded history in India
- Today, those sectors which welcomed India’s affluence are anticipating market corrections, courtesy of bumper run-ups. Sectors like Auto, and Metal (representing Infra) are expected to lead next-gen growth as Govt. looks to publishing India as the world’s new manufacturer. The support is evident in policy announcements of Atmanirbhan Abhiyan, car scrappage policy and infra-oriented FY22 budget
If Indian equities can come out so strong when the world is at its weakest (reeling from biggest healthcare crisis of this century!), then it is only left to imagination to perceive what the markets can achieve in better times. As is said, “A Penny Earned Is A Penny Saved”.
