23rd March 2020 – Perhaps for the first time, we witnessed a nation-wide lockdown. Nobody had ever imagined life coming to a standstill for many days to come. Businesses were shut overnight, life was uncertain. 23rd March 2020 was also the day when Indian equity markets saw a recent low with Nifty closing at 7610. The future was uncertain – uncertain for employees, uncertain for businesses. Amid this uncertainty, nobody will blame the investor in the market to sell and take some cash before things go worse. Market recovery looked a distant dream.
23rd March 2020 was also the day when we got ready for more turmoil – we expected job losses, economic slowdown, recession and of course the fear of corona had just began. A little over 100 days later, we as a nation are still trying to fight corona on one hand and uncertain economic environment on the other.
And it is almost stunning to see the stock markets go crazy and stage one of the fastest recovery with a 41% upmove since 23rd March 2020 and is currently just 13% away from its 52-week high.
This has made experts scramble to find a ‘great reason’ or a ‘great story’ which can explain this market recovery, I just want to throw up some insights and help you see the truth behind this recovery. You can then formulate your own story and become an expert too!
Nifty vs. Your Investments: The disconnect
As an investor when you see the rally in Nifty, you feel happy and ecstatic. But when you look at your stock portfolio or mutual fund returns, you start wondering if your fund is really a good fund – because the recovery here is not as stunning as Nifty.
Well, the problem may not be with your investments. To understand the problem, first let us see what is happening currently in the markets. We will then try to assess what may happen to the markets in the coming weeks.
What is driving market recovery?
To understand what happened between 23rd March and today, I decided to look at how the 50 stocks of Nifty have performed during this period. I have also given a table with the data, for those who get excited by the numbers. Some key observations from this data are as follows:
- Nifty has gone up by 41.5% between 23rd March and 10th July
- Only 19 of the 50 stocks of Nifty have increased more than Nifty. Of the top 20 stocks in terms of weightage in Nifty, only 6 have performed better than Nifty.
- Only 3 of top 10 stocks have gone up more than Nifty during this period – Reliance Industries, Infosys and HDFC Bank.
- Reliance Industries (12.46% weightage in Nifty) has more than doubled during this period (return of 112%), Infosys (6.22% weightage in Nifty) has gone up by almost 49% and HDFC Bank (10.66% weightage in Nifty) has gone up by 43%
- While Nifty is just 13% away from its 52-week high of 12430, 22 stocks are still more than 30% away from their 52-week high
The Stars of Market Recovery
The rally from 7610 to 10768 can be attributed largely to these stocks:
- Reliance Industries – thanks to the weekly sale of Jio, the stock has been on fire during the entire period.
- HDFC Bank – with moratorium announced and business slowdown, banking as an industry is on a crossroads staring at big problems. But, HDFC Bank, popularly known as the 20% growth company has attracted investors because of the disciplined lending history of the bank. Its other peers like ICICI and Kotak have not received a similar response and SBI looked like an untouchable stock during this period with only 7.5% recovery.
- Infosys – Software as an industry was less affected due to lockdown because employees could adapt to working from home. Uncertainties in US has had little impact and the weaker rupee is helping the likes of Infosys and TCS which is closely following the recovery path.
- Supporting Actors: The rally in Nifty has been supported to a small extent by a few other stocks. Sun Pharma and Cipla have shot up during this period due to speculation about vaccine and higher demand for medicines across the world. Mahindra & Mahindra has shot up with better rural demand of tractors post the opening of lockdown.
Basis above data, I can say that the rally in Nifty has been led by these 4 to 6 stocks. The pattern is similar across the market. Only a handful of stocks are showing phenomenal run in the prices and contributing to market recovery. This is why your stocks or your mutual fund scheme has not shown a similar recovery. A mutual fund scheme typically holds anywhere between 25 to 45 stocks. Not all of these have staged a dramatic recovery and hence the returns are tapered at the moment.
What lies ahead – Market Recovery or Downfall Imminent?
I am listing out possible scenarios in the weeks to come
- As I said earlier, the rally has been led by only a handful of stocks. Other stocks may start participating in the rally resulting in further up-move in Nifty.
- Stocks like Reliance may start cooling down considering the likelihood of fresh sale of Jio is much lower. With no major news coming by, the quarterly result of Reliance may decide the short term direction for the stock. It is highly likely that the short term direction for Nifty also will more or less be the same.
- The quarterly results of industry leaders will give an idea about the immediate impact of lockdown on revenues and earnings. This will take away a lot of speculation that is currently driving the market.
- Trajectory of the number of Covid-19 cases will play a major role. Maharashtra and Karnataka have announced lockdowns once again. The worst may still not be behind us as far as the pandemic is concerned. This will definitely have a spillover effect on the stock markets.
What should investors do?
If you are a short-term trader, I have just one advise for you – let trend be your friend. If you are an investor into equities or equity mutual funds, stay invested and continue your regular investments.
The road ahead is bumpy but this is the true test of your discipline and determination. Do not withdraw now and do not think of stopping additional investments. Five years down the line, you will realize that this was the best investing decision you have made. Ride the tide and let the uncertainties slide!
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Performance of Nifty & Its Constituents since Lockdown was imposed
|Stock||Weightage in Nifty||Current Price (Rs.)||Price on 23rd March 2020 (Rs.)||52 Week High (Rs.)||% change from 23rd March||% change from 52 week high|
|Reliance Industries Ltd.||12.46%||1879||884||1885||112.56%||-0.32%|
|Mahindra & Mahindra Ltd.||1.13%||554.7||293||638||89.32%||-13.06%|
|Hindalco Industries Ltd.||0.49%||163.7||88||221||86.02%||-25.93%|
|Britannia Industries Ltd.||0.98%||3726||2138||3754||74.28%||-0.75%|
|Hero MotoCorp Ltd.||0.76%||2679||1616||3023||65.78%||-11.38%|
|Tata Motors Ltd.||0.41%||107.5||66||202||62.88%||-46.78%|
|Adani Ports & SEZ||0.60%||335.1||208||429||61.11%||-21.89%|
|Indusind Bank Ltd.||0.66%||539.1||336||1596||60.45%||-66.22%|
|Sun Pharmaceutical Industries Ltd.||1.18%||493.4||324||513||52.28%||-3.82%|
|Bajaj Auto Limited||0.85%||2893||1936||3315||49.43%||-12.73%|
|Bajaj Finance Ltd.||1.73%||3313||2266||4923||46.20%||-32.70%|
|Bharti Infratel Ltd.||0.43%||209||143||296||46.15%||-29.39%|
|HDFC Bank Ltd.||10.66%||1105||772||1306||43.13%||-15.39%|
|Axis Bank Ltd.||2.12%||439.5||309||766||42.23%||-42.62%|
|Eicher Motors Ltd.||0.59%||19453||13706||23450||41.93%||-17.04%|
|Grasim Industries Ltd.||0.56%||611.5||433||939||41.22%||-34.88%|
|Bharti Airtel Ltd.||3.10%||574.7||407||612||41.20%||-6.09%|
|Maruti Suzuki India Limited||1.79%||5958||4220||7759||41.18%||-23.21%|
|Bajaj Finserv Ltd.||0.82%||6482||4621||9950||40.27%||-34.85%|
|Bharat Petroleum Corporation Ltd.||0.69%||376.4||269||549||39.93%||-31.44%|
|HCL Technologies Ltd.||1.39%||582.4||417||623||39.66%||-6.52%|
|Zee Entertainment Enterprises Ltd.||0.36%||170.1||122||405||39.43%||-58.00%|
|Dr Reddys Laboratories Ltd.||1.10%||3906||2897||4190||34.83%||-6.78%|
|JSW Steel Ltd.||0.44%||193.3||144||297||34.24%||-34.92%|
|Tata Consultancy Services Ltd.||5.05%||2222||1670||2303||33.05%||-3.52%|
|Shree Cement Ltd.||0.71%||22279||16959||25355||31.37%||-12.13%|
|GAIL (India) Ltd.||0.44%||102.4||78||149||31.28%||-31.28%|
|Oil & Natural Gas Corporation Ltd.||0.68%||78.6||60||154||31.00%||-48.96%|
|Nestle India Ltd.||1.41%||16838||12945||18370||30.07%||-8.34%|
|Larsen and Toubro Ltd.||2.66%||932.2||724||1551||28.76%||-39.90%|
|ICICI Bank Ltd.||5.25%||360.4||284||552||26.90%||-34.71%|
|Tata Steel Ltd.||0.56%||338.6||271||506||24.94%||-33.08%|
|UltraTech Cement Limited||1.04%||3800||3055||4754||24.39%||-20.07%|
|Housing Development Fin. Corp. Ltd||7%||1886||1521||2500||24.00%||-24.56%|
|Kotak Mahindra Bank Limited||4.60%||1350||1098||1740||22.95%||-22.41%|
|Titan Company Ltd.||0.91%||961.8||801||1390||20.07%||-30.81%|
|Hindustan Unilever Ltd.||4.49%||2224||1870||2614||18.93%||-14.92%|
|Tech Mahindra Ltd.||0.78%||568.6||487||846||16.76%||-32.79%|
|Asian Paints Limited||1.76%||1703||1498||1916||13.68%||-11.12%|
|Power Grid Corporation of India Ltd.||1.03%||172.7||153||216||12.88%||-20.05%|
|State Bank of India||1.58%||195.7||182||374||7.53%||-47.67%|
|Indian Oil Corporation Ltd.||0.50%||86.15||81||156||6.36%||-44.78%|
|Coal India Ltd.||0.64%||131.3||128||234||2.58%||-43.89%|
Data Obtained from Yahoo Finance