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CY21-Taking stock

A year of heightened activity!

* CY21 was a year of heightened activity on multiple fronts. The year began with a hope as the country put behind the first COVID-19 wave, only to encounter a much more severe second wave in March-May’21. Subsequently, as the wave ebbed, the economy and markets saw good recovery. This was led by the domestic vaccination drive that began modestly and acquired momentum along the way to end CY21 with a mammoth ~1.45b administered vaccine doses. CY21 witnessed record primary market activities with the highest ever fund-raise and debut of several new-age digital tech businesses on the bourses. Corporate earnings continued to build on the FY21 momentum and looked set for another strong year of earnings. Unsurprisingly, the markets did well with strong inflows from DII’s and record SIP investments offsetting the FII selling towards the later part of the year. CY21 continued to see strong participation from non-institutional investors. While the year witnessed several disruptions on the global supply chain front with shortages of chips and ships, the macro conversations were dominated by inflation raising its head globally and consequent Fed action with the much debated TAPER finally making its presence felt. As we usher in CY22 with the third wave of COVID-19 knocking at our doors, we take a look back at the year gone by and present some of the key highlights of 2021.

* In CY21, the Nifty recorded an impressive 24% YoY gains. The index rallied strongly (up 26% YoY) until 3QCY21 driven by the decline in COVID cases, a significant pick up in the pace of vaccination, and the consequent sharp revival in economic activity. However, the detection of Omicron (a new variant) in South Africa and its gradual spread to several other countered coupled with possibility of interest rate hikes ahead led to a 1.5% QoQ decline in Nifty in 4QCY21.

* Major economies ended higher in CY21: Barring Brazil (-12%) and MSCI EM (-5%), key global markets such as the US (+27%), India (+24%), Taiwan (+24%), the UK (+14%), Indonesia (+10%), Russia (+8%), Japan (+5%), China (+5%), and Korea (+4%) ended higher in CY21 in local currency terms. MSCI India (+27%) has outperformed MSCI EM (-5%) significantly in CY21.

* All the sectors delivered positive returns: The Nifty Midcap 100 (+46% YoY) and Nifty Smallcap 100 (+59% YoY) outperformed the benchmark. Top gainers in the sectoral space were Metals (+70%), Utilities (+69%), Technology (+60%), Real Estate (+54%), and Capital Goods (+53%), while Private Banks, Consumer, Healthcare, Finance and Automobiles underperformed. Commodities and Global cyclical led the earnings revival and consequently the sectoral performance metrics.

* Stock performers: The breadth was positive in CY21, with 42 Nifty stocks closing higher. Tata Motors (+163%), Hindalco (+98%), Wipro (+85%), Bajaj Finserv (+84%), and Tech Mahindra (+84%) were the top performers. Conversely, Hero MotoCorp (- 21%), Kotak Mahindra Bank (-10%), Bajaj Auto (-6%), Dr. Reddy's Lab. (-6%), HDFC Life (-4%), Maruti Suzuki (-3%), HUL (-1%), and Indusind Bank (-1%) were key laggards.

* Flows – DIIs recovered strongly: FII inflows decelerated to USD3.7b. However, DIIs bounced back to USD12.1b inflows after recording outflows in CY20.

* Domestic fund raising was at its best: Primary market activity was buoyant, with many new age companies (such as Zomato, Nykaa, Policy Bazaar, Paytm, etc.) raising capital. INR1.3 Trillion has been raised in CY21 via IPO’s, beating the previous record of INR760b raised in CY17.

* Valuations: After the sharp rebound, the Nifty now trades at a 12-month forward P/E of 20.8x, c.8% above its historical average of 19.2x. The Nifty P/B too, at 3.2x, is well above its historical average of 2.6x. The market capitalization-to-GDP ratio is at a yearend high of 116% (we expect nominal GDP to increase 16% YoY in FY22).

* The year ahead: While 2021 was all about growth and recovery from the low base of 2020, the focus of central bankers across the world has shifted towards inflation and monetary policy normalization post the pandemic given the context of US Fed Tapering and potential hardening of interest rates in CY22. Given the rich valuations, the corporate earnings delivery therefore becomes even more crucial. We note that FY22 and FY23 earnings estimates of Nifty have been stable despite several headwinds. Meanwhile, the third COVID wave has once again resulted in imposition of some state-level restrictions. While this wave, so far, seems less severe in terms of mortality and hospitalization, one needs to watch out for the trend and reactions of both the state and central governments in the next few weeks.

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