Markets set to register their best financial year performance in a decade

Despite the economy slipping into recession and all activity coming to a standstill for a few months due to the Covid-19 pandemic, are set to register their best financial year performance in a decade.

Thus far in FY21, the S&P BSE Sensex and Nifty50 have rallied 66 per cent and 69 per cent, respectively. Earlier during FY10, the S&P BSE Sensex had surged 80.5 per cent, while Nifty50 rallied 73.7 per cent.

The rally has been partly on account of strong foreign inflows on expectation of improvement in the economy after a stringent pandemic-triggered lockdown for a few months in FY21. Accommodative monetary policies of global central banks, especially the US, ensured emerging markets, including India, remained flushed with funds all through the year.

During the year, foreign portfolio investors (FPIs) pumped in a record $37 billion (Rs 2.74 trillion) into equities (up to March 26), which is the highest since FY13, data from the National Securities Depository Limited (NSDL) show. On the other hand, domestic mutual funds recorded a net outflow of Rs 1.25 trillion and became net sellers for the first time since FY13.

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As a result, from its March 2020 low of 25,639, the S&P BSE Sensex climbed to an all-time high of 52,517 points on February 16, 2021 while the Nifty 50 scaled a record high of 15,432. Rising bond yields and oil prices created some panic, but analysts say the long-term outlook for equities still remains strong.

Given the abundant liquidity, speedy rollout of Covid-19 vaccines, and consequent signs of economic recovery, Siddhartha Khemka, Head – Retail Research at Motilal Oswal Financial Services expects the Nifty Earnings to grow at a high single digit in FY21. “Improved earnings sentiment may also lead to a rebound (in the markets) in FY22. Thus, the overall structure remains positive,” he says.

Retail investors in driver’s seat

Another key driver of the market rally have been retail investors, which not only pushed frontline benchmarks to new highs but also triggered an upswing in the mid-and small-cap indices during the year. The gains in mid-and small-caps have, in fact, been sharper with both the indices rallying 111 per cent and 89 per cent, respectively on the BSE.

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As many as 222 stocks from the BSE500 index have seen their market values more-than-doubled in FY21. Adani Total Gas, Adani Green Energy and Adani Enterprises from the Adani Group rallied in the range of 700 per cent to 976 per cent. Hindustan Copper, Aarti Drugs, Dixon Technology, APL Apollo Tubes, Laurus Labs, Affle India and KPIT Technologies zoomed over 400 per cent during the fiscal.

Despite the sharp outperformance, analysts expect the rally in the broader to continue in the upcoming financial year.

“While market polarisation has increased towards large-cap indices, signifying a positive market outlook, broader have significant room to outperform large-cap indices, backed by outperforming earnings and growth,” analysts at Sharekhan said in a recent report.

The brokerage is factoring-in a robust net earnings CAGR of 26.7 per cent and 31.4 per cent in mid-caps and small-caps, respectively as against the overall net earnings CAGR of 22.8 per cent over FY2021-FY2023E.

“We believe that strong earnings growth in mid-caps and small-caps are yet to get factored in comparing their earnings growth and valuation multiples. Mid-caps and small-caps are currently trading at a P/E of 28.0x and 14.8x on FY2023E net earnings respectively.

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Among sectors, the metal index gained 144 per cent in FY21, as recovery in global economic activity and China’s infrastructure spend kept the demand for industrial metals strong. An anticipated infrastructure development-led stimulus package by some of the other large economies like the US, UK and India may spur demand for industrial metals and rally in metal prices, going ahead, analysts say.

While Automobile, information technology (IT) also logged stellar gains and doubled, real estate, capital goods, power, Nifty Bank and healthcare indices also outperformed and gained between 70 per cent and 94 per cent in FY21.

Outlook for FY22

In FY22, analysts say the markets will keep a tab on how the Covid-19 situation and the vaccination scenario plays out globally and in India. That apart, crude oil prices, bond yields, macro-economic variables (both in India and across the globe) will be among key monitorables.

“We would be cautiously optimistic at this point of time given that most of the positives have already been built in (consensus expect Nifty EPS to grow at 25-30 per cent over FY21) and keep a close eye on commodity prices as weight of stocks in the Nifty that consume commodities as raw material has always been more than that of commodity producers,” said Vinit Bolinjkar, head of research at Ventura Securities.

Given the likelihood of consolidation in the near-term, analysts suggest investors rotate funds from high PE stocks to cyclical/value plays such as metals, cement, and oil & gas. That apart IT, BFSI, healthcare, telecom, auto and consumer remain top picks from a 12-month perspective.

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