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.