Your Money: Broader equity market offers significant opportunities

By Sorbh Gupta

The S&P BSE Sensex moved up by 11.5% on a total return basis in the month of November. On the back of this strong rally, it has fully recovered from the March 2020 lows and has turned positive for the year returning 8.3% year-to-date (YTD). The S&P BSE Sensex’s performance was better than developed market indices such as S&P 500, which gave 10.1% returns during the month. It was also better than the MSCI Emerging Market Index which rose by 8.4% (like-to-like currency).

Mid-cap and small-cap indices outperformed the Sensex in November; with the BSE Mid-cap Index rising by 13.7% and the BSE Small-cap Index rising by 13.4%. On an YTD basis, their performance is much better compared to the Sensex with the BSE Midcap index rising by 14.3% and the BSE Small Cap Index rising by 24.5%.

Sectoral performance
Metals, banking, and capital goods were among the winning sectors for the month. Banking sector stocks have positively surprised in the Q2FY21 results with much better collection efficiency and asset quality. Healthcare and technology stocks underperformed during the month.

Indian equities have seen $9.6 billion of net buying by foreign investors in the month of November. This includes large passive buying on the back of MSCI. To put things in perspective, this month has seen the highest net FII buying figure ever in India. It is higher than annual inflows of the last four out of five preceding years. In the first 11 months of 2020, FIIs have been net buyers of $16.1 billion. Domestic institutional investors (DIIs) were large net sellers in the month, selling $6.5 billion worth of stock. Indian rupee was flat during the year.

US elections results & vaccine
Equity markets cheered clarity on US elections (though it emerged rather slowly than initially thought). The equity markets are factoring significantly lower global tensions both on economic and political level, thus paving the way for more predictable global recovery.

The other news of significance in November was the successful completion of clinical trials of Covid-19 vaccine announced by Pfizer-BioNTech, AstraZenca-Oxford and Moderna besides the Russian and the Chinese ones. Astra Zeneca-Oxford is the most relevant in the Indian context due to its lower cost and less challenging logistics. These developments have improved global sentiments and world markets have started a fresh rally.

Equity outlook
The benchmark indices look richly valued, after the sharp November rally, but the broader market still offers significant opportunities. We remain optimistic about Indian equities with a slightly longer-term view. As investors in the developed world seek alternatives to low yielding fixed income assets, India with a recovering economy and attractive nominal fixed income yields may look as a credible destination.

This could trigger substantial increase in FII flows into India. Higher foreign capital inflows for the next few years can potentially compress domestic interest rates further, stirring economic activity and give a fillip to the rate-sensitive sectors like real estate and construction. Both these sectors have a high GDP multiplier potential and can push growth higher over the next couple of years compared to our current estimates.

The writer is fund manager, Equity, Quantum AMC