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While 2021 will close some dark memories for India and its gruesome second wave of COVID-19, the stock market will look back on this year with a very different lens. New lifetime highs for the Sensex and Nifty, a never-before-seen deluge in the primary market and a gush of liquidity from all quarters, global and local. Samvat 2077, the Hindu calendar year, has had many high points.
Driven by stimulus measures and easy money policies, Indian markets have posted their best gains in 13 years in Samvat 2077. Not did the benchmark Nifty just deliver more than 40% returns, it was the Mid-Caps and Small caps that outperformed, with returns of around 70% and 80% respectively.
For enthusiastic retail participation this one is a must and high beta, as it is called in stock market parlance, rose to the occasion; a heady cocktail of ‘high risk- high return’. As we turn the page on this Samvat, a few things stand out.
Commodity prices and their impact on inflation and corporate earnings
While earnings for companies in the stock market ecosystem have held strong, the most recent numbers betray some pressure from rising commodity prices on margins. There is also greater divergence between performances. Two-wheeler makers like Bajaj Auto and Hero are seeing monthly sales suffer for instance, while carmakers are still speaking of strong pent-up demand. Going forward, we may well see more of this. It may not remain a ‘rally for everyone’ market.
Policy stance of global central banks, especially the US Federal Reserve
After the two-day meeting of its Open Market Committee (which decides US monetary policy) ended earlier this week, the Fed has announced it would, from next month, cut the size of its purchases by $15 billion a month. Markets seem to have taken the news of this scale down or ‘taper’ as it is called in its stride. But the Fed may have a much more uphill task when it comes to ‘lift-off’ or actual rate increases. Remember, global markets have been fed on and bloated by ultra-cheap and plentiful liquidity since 2008. The last time the Fed began actually raising rates, in 2018, there was a mini tantrum in markets, with the US share market plunging about 13% within a month. The rate and pace of rate hikes are still unclear at this point, but some tell–tale signs of pressure have shown up in Indian markets.
Foreign institutional investors (FIIs) have net offloaded Rs 5,476 crore ($732 million) worth of shares in November already. This comes on the heels of net sales of Rs 13,550 crore ($1.8 billion) last month – the highest single month of net sales since March 2020. In 2021 so far, FIIs have been net sellers only in April, July and October. I would watch the numbers through November very carefully.
IPO pipeline and high retail interest
The counter to arguments about foreign liquidity has been the fact that domestic participation has grown in leaps and bounds, both by way of new entrants and the quantum of local money. Both are true, but the real draw has been the primary market. Samvat 2077 closes up a record year for initial public offerings (IPOs). Prices, valuations and listings that have often belied both logic and reality, these issuances have seen both frenzied subscription and handsome listing gains. I know it feels like this is a party that will never stop. But markets and history have an uncanny ability to repeat the lessons they teach us. A correction will come, in the greed and hubris of this valuation bubble. My only hope is, a younger generation of retail, that is possibly playing the IPO roulette with much smaller sums of money, will not get too badly burned.
Of course, a fractured global economic recovery, a fresh wave of COVID-19 remain other risks, but not something this market has not reckoned with.
There also remains limited choice. In Samvat 2077, gold prices were down nearly 6% compared to gains of 26% and 23% in the previous two years. Real estate is picking up but in select pockets – high-end residential is seeing improvement, commercial still struggling. What may give the equity market competition, especially given the profile of retail investors (younger, higher risk-taking ability) is the thriving crypto universe. While the validity of this asset can be debated, it is high time the government created a roadmap for it to be a tradeable commodity with appropriate regulation.
Where does that leave things for the next Samvat? ‘Brace for volatility’ comes a close second to ‘time will tell’ on the list of tropes. But I believe deep pockets still hold the key for significant price movement. A sharp turn in foreign flows can dislodge our market and it may prove difficult for domestic money to completely offset that damage.
A turn in the fortunes of the IPO market may also dent sentiment and momentum, since that has been the main draw for many new investors. Choose wisely, on stocks and trades.