Indian Equities: Year 2020 in retrospect
The year 2020 has been a period of extremes for markets. During past 12months, the equity markets have kept swinging between extreme fear and greed. The year began on a buoyant note. The benchmark indices scaled their all-time high levels on 24 January, after rallying for past 4 months. In the following 2 months the indices corrected ~40% from their January highs, refreshing the fading memories of 2008 crash. A sustained rally thereafter saw the benchmark indices scaling new highs in next 9 months. This rally was remarkably different from September 2019-January 2020 rally in terms of volumes, market breadth, and participation. Foreign investors and domestic household investor have been notable buyers in 2020 rally, while the domestic institutions have been net sellers.
In my view the top 10 highlights of the performance of Indian equities in 2020 were as follows:
1. Though benchmark indices indicate that mid and small cap indices have done materially better than the benchmark Nifty; the market breadth has not been encouraging. Relatively less represented sectors IT and Pharma outperformed strongly, while the most represented financials and energy were massive underperformers.
2. Market breadth was positive only for 5months, while in seven months market breadth was negative. March 2020 was the worst month and August 2020 was the best month in terms of market breadth.
3. Indian equities were average performers, in comparison to the global peers. However, it underperformed its emerging market peers notably.
4. A lot of discussion has taken place around the strong foreign flows into Indian equities. It is however worth noting that foreign investors have invested close to Rs48,000 crores in Indian equities during 2020. But most of this has come as switch from the Indian debt. The net foreign flows to India in 2020 are marginally negative.
5. The long term Nifty return (5yr CAGR) is now consistent around 11-12% for past five year. Only 2019 was an exception with 8% long term return. This is the longest stretch of consistent returns. This highlights the maturity of Indian markets; and also lesser probability of exceptional gains in near future.
6. Nifty averaged around 10985 in the year 2020. This is about 4% lower than 2019 average. During previous two crisis periods (2001-2002 and 20008-2009), the fall in yearly average traded value of Nifty lasted for two consecutive years. But the third year saw strong recovery in the average traded value. If the history repeats, the Nifty may average below 10985 in 2021.
7. The market saw sharp rise in speculative trading activities during the year. The percentage of total shares traded to the shares delivered fell from 20.5% in March to 15.05% in June. However, it has again improved to 19.6% in November.
The net new money invested in equity trades (NSE net pay in) was highest in March 2020 when the market correctly sharply; implying that the first fall bought aggressively. May-June also witnessed higher new money.
The size of average trade increased to Rs32462 in November 2020 from the low of Rs22314 in March 2020; implying that the smaller investors are now less active in the market.
8. After losing ~30% in 1Q2020; Nifty gained ~20% in 2Q2020; ~9% in 3Q2020 and ~20% in 4Q2020. The gains in last three quarters have come without any correction. Only the month of May2020 has yielded negative return of (-)2.8% since April 2020.
9. Despite the crises and sharp correction in the market early in the year, the volatility has not spiked like the previous two crisis periods. Consequently, the arbitrage funds have sharply underperformed, yielding less than the liquid fund returns. Gold ETFs outperformed most of the equity fund categories.
10. The Nifty earnings have seen a spate of upgrades in recent weeks. However, normalized for the base effect of FY21, the growth continues to remain anemic. Most of the appreciation in equity prices therefore could be purely due to PE rerating to factor in lower interest rates. This implies, interest is perhaps the single most critical factor to watch in 2021. Any sign of hike in rates could result in sharp correction in equity prices.