Vijay Kumar Gaba

After some exciting action post presentation of Union Budget for FY22, the benchmark indices have moved sideways with heightened intraday volatility. The broader markets have definitely outperformed suggesting some superlative returns for the investors. However, when assessed from the rout of small and midcaps in 2018 and 2019, it is clear that broader markets may not have actually yielded much return, even to the investors who have stayed put for 3year. For example, Nifty Smallcap100 index has not yielded any return for past 3years; and Nifty Midcap100 return is only slightly better than the bank deposit return since March 2018.

Notwithstanding the massive visual gains recorded by equity prices in past 12 months, the portfolio returns for most investors may have been below par.

The returns on debt part of the portfolio have been poor, with real returns being negative in many cases. For a large proportion of investors, debt part is usually equal to or more than the equity part.

Since global financial crisis (2008-09), gold has also found prominent place in asset allocation of numerous investors. The efforts of government to popularize financialization of gold through gold bonds etc., have also motivated household investors to invest in gold. For past one year, the return of gold funds is close to zero. The three year return of gold funds is less than savings bank accounts.

Regardless of the outperformance of small and midcap stocks, it is important to assimilate that usually these stocks are much smaller part of an average portfolio. Any superlative return on this part of the portfolio, may not necessarily translate in outperformance of overall portfolio.

A simplified analysis of sectoral performance of Indian equities highlights the following:

(a)   The euphoria created by the brave and revolutionary budget has not lasted much. Nifty is almost unchanged for past five weeks.

(b)   Optically, it appears that budget ignited risk appetite for growth trade. It is believed that big money rotated towards cyclical sectors like commodities, infrastructure, automobile, etc. post budget. The aggressive disinvestment agenda underlined in the budget also attracted huge interest in public sector stocks. Consequently, metals, energy, infra, PSEs, and Realty sectors have outperformed since presentation of budget. Whereas, the favorites of post lock down period, i.e., consumers, pharma and media have yielded negative return since then. IT has also underperformed YTD.

The fact is that metals are participating in a global rally (reflation trade) and may not have much correlation to budget proposals. Energy sector performance is highly skewed due to Reliance Industries performance, which is popular due to its retail and telecom ventures rather than its energy business. Infra outperformance has actually diminished post budget, as compared to past 12months performance.

Auto sector has yielded no return since budget; and financial services have actually underperformed Nifty.

(c)    Assuming that most household investors and fund managers believed in this Cyclical growth trade story and have started to rotate from the defensive and secular businesses like IT, Pharma and Consumers in post budget period and the rotation may be completed in next couple of months. I would like to wager that it will be time for outperformance of IT, Pharma and Consumers by the time monsoon hits the Mumbai coast.

(d)   Private sector banks have underperformed their public sector peers over past one year period. Much of this outperformance of PSBs has occurred post budget. Valuation gap, promise of reforms and recapitalization, improving balance sheets are some of the primary reasons for this outperformance. Watch out for any disappointment on these parameters.

Bond market is obviously not happy with the state of fiscal and macroeconomic factors. Recent sharp rise in Covid cases has also raised the specter of “relock”. Year end “adjustments” may also play some part in markets in next couple of weeks. In my view, it’s time for some extra caution rather than exuberance. Preserving wealth should be a priority at this point in time over maximizing profit.