The Nifty was down 26% in the last financial year (FY2020) driven by a sharp fall in February & March as Covid-19 started to spread rapidly across the world and most major economies went into lockdown mode. This sharp fall took most investors by surprise, but what is equally surprising is the speed with which markets have been gaining momentum over the past 3 months, with the Nifty up 19.7% since 31st March. The lockdown has brought several businesses to a standstill, job losses are widespread and balance sheets of many companies are stretched. Moreover, with high levels of Covid-19 related fears, customers are not yet ready to venture out and start their normal consumption.
The Nifty bottomed out on March 24th, which is coincidentally around the date when India went into a lockdown mode. The recovery in the Indian markets closely follows global markets and the S&P 500 bottomed out around the same time. Since then the S&P 500 has staged a sharp come back, currently trading at about 10% below its previous peak (The Nifty is trading about 17% below its peak seen in Jan 2020). Global sentiment does have an impact on Indian markets, especially with FPIs (Foreign Portfolio Investors) holding nearly 19% of all companies listed in India. Many large economies have also infused huge amounts of liquidity to support their economies and this helps India too indirectly. Large companies like Reliance, Kotak, Airtel, etc have been on a capital raising spree and many other companies & promoters are also in the process of raising capital. One of the primary purposes of capital markets is to provide capital to businesses and it is good to note that the system is working well even in times like this. Markets were also very cheap on valuations towards the last week of March, which supported the recovery.
There are some limitations to a liquidity led rally. Eventually corporate performance and valuations will dictate the future direction of stock prices. It is well known that the June 2020 quarter would be the weakest quarter for corporate India in known history, due to the lockdown. On the other hand, we notice that all businesses and companies are not equally affected. Many companies have seen nil revenues, or close to that, for 2 months and it is going to take a long time before these businesses get back to pre covid levels – in some cases they may never get back. On the other hand, there are several businesses where the customer demand is still relatively intact. Sectors which are less affected by the lockdown include FMCG, pharmaceuticals, IT services and non-lending financials among others. We can even expect a few businesses to see some tailwinds as the post-Covid world emerges. The world will increasingly move to the digital way of doing business and companies facilitating that will benefit.
Stronger companies with better balance sheets and strong competitive strengths (many of our portfolio companies fall in this bracket) are expected to gain market share in this environment as they are better prepared to deal with adversity. This is a great source of comfort for us, as we all deal with the post covid world. Over the years, these companies have used their competitive strengths and strong balance sheets to navigate the different challenges that they have confronted over time and we expect this time to be no different. Having said that, we would like to repeat what we said in our last newsletter – Can we continue to have drawdowns from current levels in the short term? It is certainly in the realm of the possible. But we do expect that the long term upside remains very good, given current valuation levels of the stocks in our portfolio.