The month of February was yet another strong one for Indian equity markets with the Nifty 50 gaining 6.6%. The broader markets did much better with the BSE Midcap index up 10.5% and BSE Small cap 250 index up 12%. Interest clearly shifted to economy related stocks and cyclicals even as valuations became the dominant driving factor for stocks. On the domestic front, positive sentiments were driven predominantly by expansionist announcements in the Union Budget and strong corporate results for Q3 FY21. Foreign flows continued to be strong with inflows of ~USD 3.5 bn.
Indian economy exited recession as real GDP growth came in marginally positive in 3QFY21, driven by manufacturing, construction, and financial/real estate sectors. The Prime Minister and Finance Minister reiterated privatisation of most government companies in multiple forums. That led to renewed interest in PSU (public sector undertakings) stocks and boosted general investment environment.
Globally, concerns arose towards end of the month led by a sharp increase in US 10-year yields to 1.6% briefly. However, US Federal Reserve chairman Jerome Powell reiterated the Fed will not hike interest rates prematurely and the central bank’s support to the economy will continue despite a brighter outlook.
January began on a positive note as India approved emergency use of two Covid-19 vaccines, the UK government announced a US$6.2 bn support package, US President announced US$1.9tn Covid-19 relief plan and Mr Joe Biden took over as new President of USA. Towards the second half of the month, global markets corrected sharply, partly due to concerns over new strains of the Covid-19 virus and fresh lock downs and general profit booking. Indian markets corrected bit more as apprehensions over new taxes in the upcoming budget started to do the rounds. The BSE-30 and Nifty-50 indices closed January down 3.1% and 2.5% for the month. The BSE Midcap index gained 0.8% while the BSE Smallcap250 index was up 0.7%.
With most challenges turning around positively, the most important question in the minds of investors and prospective investors is valuations. With Sensex at 50,000 and Nifty at 15,000, what should we do? Yes, markets are at an all-time high and stocks are not exactly cheap. However, given the possibility of sharp improvement in earnings for the next few years on the back of expansionist government policies, sharply improving demand, low interest rates and ample liquidity; there is room for decent returns from equity markets from a medium to long term perspective. After years, we are witnessing big earnings upgrades and more importantly these upgrades are across sectors and company sizes.