Sharp contraction in GDP
June quarter GDP contraction was quite serious across the globe on account of ‘Stay at Home’ strategy adopted by most governments. India was amongst the worst hit with 23.9% contraction in GDP. Unfortunately, the population density and the sheer size of population resulted in India having the 2nd highest cases in the world after USA.
However, with economies gradually opening up, recent data suggest stability is coming back in various sectors of the economy with many of the auto majors showing Y-o-Y growth in August, construction activity now coming back to almost pre-COVID level, credit card spends witnessing Y-o-Y growth as per August month data, rural dependent sectors showing higher growth month-on-month on the back of better monsoon and higher farm incomes.
Global Stock Markets
Despite the pandemic, the global stock markets (especially the US market) continue to be on steroids driven mainly by excess liquidity as well as lack of investment opportunities.
But globally, the investors seem still unsure on the return to normalcy which has resulted in Gold also being near its all-time high as demand for gold increases in uncertainties.
The launch of vaccine will be next big trigger which will result in investors moving out of gold as well as giving a push to economic activities globally.
Indian Stock Markets
For those who spend a lot of time trying to understand how the markets work, there is something ironic that played out in the last few months. After making a peak of 12430 in January 2020 and trading at over 11300 in first week of March, Index fell to a low of 7583 on March 23rd i.e. a collapse of ~40% from the peak in a matter of weeks.
However, by March 23, our lockdown hadn’t even commenced, and we barely had 500 cases of COVID infections. Infact after lockdown started and COVID became a serious issue, we have seen markets stage a very sharp rally of more than 45% from the bottom for Nifty and Sensex whereas Mid and Small-Caps have generated returns in excess of 65%.
We believe the current trend of Mid and Small-Cap outperformance is sustainable on account of below mentioned key reasons:-
· Value investing is back in favor over the last few months as can be seen from the returns generated by sectors like metals, banks and PSUs.
· Recent notification from SEBI w.r.t. change in Multi-Cap Fund rules should result in attraction in quality Small-Cap companies.
· A bit of saturation in select companies owing to polarized rally of last 2 years.
Another peculiar feature in the last few months has been that nearly all the conversations start or end with ‘how bad the situation is on the ground’. While monitoring the same is important, we invested more time on visualizing about the changes in post-corona world, testing our thesis with data and we have started aligning our portfolio accordingly.
The June quarter earnings (Q1’21) for corporate universe were better than expectations. Though revenues for the first quarter were impacted by COVID-led lockdowns, corporate India undertook stringent cost control measures to protect their bottom-line and arrested the decline in net profit.
Nifty sales declined 29% YoY (vs estimates of 30% decline), while EBITDA/PBT/PAT declined 6%/30%/26% YoY (vs estimated decline of 11%/39%/35%). Further, more than 50% of Nifty 50 companies reported a beat on their PAT estimates.
According to the report Healthcare, Utilities, Chemicals, Private Banks and Technology sectors reported YoY profit growth, while Autos, Retail, Metals and Telecom posted losses. Overall management commentaries indicated MoM improvement in demand during the quarter after easing of lockdown restrictions.
While on the macro front, the COVID situation and India-China face-off continues to remain under watchful consideration for any change in sentiments. On the other hand, if the recovery rates of COVID cases in India remains as it is now, then month on month – with economy opening-up, things should be better (which is also a belief by majority of managements).
We believe that right re-shufflement in these times and staying in quality companies with minimum impact could enable us to perform well in these turbulent times. We continue to search for stocks of quality businesses in sectors which are least impacted due to COVID or have recovered to pre-COVID levels and structurally compounded their earnings which is led by market share gains. We continue to believe that a crisis is the best time to build a quality portfolio and we are putting our best efforts to do the same for you.
We would like to end the update with the following quote:-
“The key to making money in stocks is not to get scared out of them” – Peter Lynch