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Market Matters January 2021
January month saw the Indian equity markets indices retreating from new all-time highs levels primarily on account of weak global cues. Union Budget was well received by the equity markets as it contained pro-growth expansionary measures. However, larger than anticipated borrowing plan of the government to fund the deficit meant that it also dented sentiments in the domestic fixed income markets.
Globally, governments in major economies proposed corona virus relief packages but concerns around the emergence of new virus variant and subsequent lockdowns outweighed the positives. Market news narrative was also dominated by retail investor trading euphoria surrounding select stocks with relatively weak fundamentals which caused a short squeeze of sorts, taking their prices to stratospheric levels. US macro-economic data releases were mixed. US Dollar rose to month highs. Crude oil rose on account of supply tightness whereas precious metals were firm. China’s economic growth returned to positive territory over the previous calendar year. Domestically, Union Budget saw a substantial increase in capital spending, one of the highest in over a decade, with a special focus on infrastructure creation. Among other things, there wasn’t any tinkering on the taxation front, which was another positive. COVID-19 recovery rate continued to surpass infection rate leading to a significant drop in the active caseload. Retail inflation continued to moderate on MoM basis whereas the other economic variables viz., GST collections (for December) & manufacturing PMI continued to expand. Industrial production contracted. Rabi sowing climbed to new highs.
Accommodative monetary conditions of major global central banks & ultra-low interest rates caused a surging tide of liquidity propelling equity market valuations. This was due to multiple expansion without accompanying meaningful earnings growth. Markets were hovering above 21x PE multiple zone for past 3-4 years which in historical context is considered as expensive for the domestic markets. COVID-19 triggered a correction which brought down market valuations. Post the pandemic outbreak, major global central banks and governments swung into action and infused unprecedented amount of monetary & fiscal stimulus respectively. This combined with rapid progress on vaccine development and improving data buoyed market sentiments which helped the markets rebound from the lows. Past experience suggests that post such a tectonic shift, there could be a rotation of sector leadership and newer sectors could emerge as leaders. On the fixed income side, the RBI MPC continued status quo on policy rates with an indication to continue its current accommodative policy stance into the next financial year. It reiterated its stance on liquidity in-line with its policy stance along with the usage of a variety of measures to support liquidity and the yields. Softening of the CPI inflation provides monetary policy with some headroom space to support economic growth.
Going ahead, market focus would remain on vaccine approval and distribution. Emergence of a new mutated virus variant brings to the fore unknown risks especially against the backdrop of the efficacy of current vaccines against this mutated virus variant. Other risks include sharp rise in commodity prices, flare up in geo political tensions & trade wars.
There are initial signs of corporate earnings revival as reflected by better than expected Q3FY21 corporate earnings performance. Thus, the optically high headline market valuations could be factoring an uptick in earnings. However, only the next quarterly earnings performance will provide a better sense on the overall earnings trajectory. Considering the sharp rise in market valuations post the Budget announcements, intermittent equity market correction cannot be ruled out from current levels. Market volatility could rise in the short term but it can also provide attractive opportunities to accumulate quality stocks. Bond yields had risen on account of the governments additional borrowing this fiscal and large borrowing programme in the next fiscal and uncertainty among the market participants surrounding the liquidity stance. Systemic liquidity continues to remain in surplus and offset to an extent the impact of high fiscal deficit & additional government borrowing.
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