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Market Macroscope : April 2021

Macroeconomic Review:

The $1.9 trillion US fiscal stimulus was approved in early March. US President Biden also unveiled a further $2 trillion infrastructure plan. This is only the first part of what is likely to be a $4 trillion plan. The infrastructure plan would focus on transportation, water, clean energy and manufacturing among others. The Biden administration plans to raise US corporate tax rates from the current 21% to 28% to finance the plan. It is likely to take 2-3 months for the plans to be approved. We expect the tax increases to be a near term risks for equity markets. You will recollect that Trump had cut US corporate taxes to 21% early in his tenure and that had led to a sharp rally in US equities.

The US bond yields have been trading in a narrow band for the last couple of weeks but this is a risk to be monitored. Any large spike in bond yields could be negative for equity markets in the near term.

India’s GST collections continued to be close to record highs in each of the past few months suggesting continued strength in the economy. However, March saw a sharp increase in Covid infection in India and some states and cities have imposed partial lockdowns/ night curfews. A continued increase could disrupt the nascent economic recovery.

The RBI’s Monetary Policy Committee held rates unchanged in its early April meeting with a commitment to keep an accommodative policy. India’s 10-year bond yield has shown some stability and traded in a narrow band over the last couple of weeks. The Supreme Court decided in favour of the banks in a plea urging waiver of interest during the lockdown. The Supreme Court also lifted the stay on classification of accounts as NPL.

Equity markets review:

The market movement in March can best be described as sideways with no big triggers to move the markets in either direction. The increase in Covid cases was a negative surprise for the markets. The FII buying activity, which has fueled the rally in the last six months, was much lower in March compared to the past few months. FIIs invested Rs. 10,482 Crores in the Indian equity markets in March 2021 while domestic mutual funds reported net outflows.

Nifty increased by 1% and Bank Nifty fell by 4.3% respectively during the month. Financials and realty were one of the worst performing sectors during the month. FMCG and IT services, which had underperformed sharply in February were among the best performing sectors in March.

The best and worst performing stocks within the NSE 500 universe are shown in the table below. Stocks from the Adani group had a strong run.

IPO Review:

March 2021 was a strong month in terms of no. of IPOs issuances with 9 companies raising Rs. 6,082 crores during the month through a mix of OFS and fresh issue of shares. However, the investors would be fairly disappointed with the listing prices of many of the IPOs. Only 3 out of the 9 companies which started trading in March, Heranba, MTAR Technologies and Nazara Technologies, gave outsized gains. Two other, Easy trip and Laxmi Organics, gave 13-19% returns on listing day. The other 4 companies gave negative returns on listing date.

Many of the companies listed at far below the supposed “grey market premium” (GMP) that had been quoted by some of the market participants. High GMP influenced many investors to subscribe to these IPOs. We have always maintained that the GMP is too opaque and too illiquid to be trusted as a valid signal. We hope that this month has thoroughly discredited GMP. At the very least, the message investors should take away is that IPOs too have risk and evaluating that carefully is important.

Outlook:

All eyes this month should be on the results of the March quarter. In the last 2 consecutive quarters, companies have beaten street expectations and earnings estimates have been raised. We expect companies to report strong results again this quarter. However, the element of positive earnings surprise is likely to be much lower than in the last 2 quarters because of the increased estimates. Results of the banking and NBFC sector is the key known unknown and the street will be closely watching the guidance of the companies in the sector

Risks:

The sharp increase in Covid 19 cases in metros and the prospects of new lockdowns are a key risk for the markets. Global Inflation prints will be closely watched and could move bond yields and impact equity markets.

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