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What is different in the market rally in FY21 is the lack of support from domestic institutional investors and weak economic macros (Mint)
What is different in the market rally in FY21 is the lack of support from domestic institutional investors and weak economic macros (Mint)

Markets set for 10-yr high gains in FY21 despite covid

If markets continue to rally, gains in FY21 may even top the previous best of FY10

Despite covid-induced turbulence, Indian stock markets are set to see their best performance in a decade in 2020-21. During the financial year, which ends on 31 March, India’s benchmark index Nifty has gained over 65% so far. Data showed that in FY20, Nifty ended 26% lower mostly because of the crash in March, as the Centre had announced a complete lockdown in the country in the last week of the financial year.

This compares with a 73.76% rise in FY10, while in the remaining nine years since then, Nifty has seen a maximum yearly increase of 26.65% in FY15. If markets continue to maintain the rally, gains in FY21 may even top the previous best of FY10.

However, what is different in the market rally in FY21 is the lack of support from domestic institutional investors (DIIs) and weak economic macros. Unlike the FY10 rally, where DIIs also contributed to positive flows along with the high level of foreign institutional investors (FIIs) inflows, the current rally has seen consistently opposing flows from FIIs and DIIs.

In FY21 so far, FIIs have pumped in nearly $30 billion in Indian shares while in FY10, it was $7 billion of foreign money. However, since the beginning of fiscal 2021, DIIs are net sellers of equities worth 1,18,371.30 crore while in FY10, they invested 24,191.85 crore.

“Mutual funds did contribute to outflows during FY10 and it was overall DIIs, which contributed positively," Vinod Karki, Siddharth Gupta, analysts at ICICI Securities, said in a note on 8 January. In the current year, Nifty has shown the fastest rally since FY10, they said. On a rolling nine-month basis, the Nifty gained 86% from its lowest point in the year, close to exhibiting the fastest rally since FY10 when it gained 103% in a similar time frame.

“Faster than expected pick-up in demand going ahead could make it a consensus buy for both FPIs and DIIs, thereby further fuelling the bull market rally. However, currently, the near-term drivers remain weak in the form of household spending because of weak consumer sentiment, fiscal constraints on government spending, and corporates cutting back on capex and opex," Karki and Gupta said.

The Indian economy is estimated to contract by a record 7.7% in FY21, the first time in more than four decades. High-frequency data for December indicated that economic recovery will continue at a slow pace, while input prices remain high and employment weak.

For smaller stocks too, FY21 is likely to be the best year since FY10. In the fiscal so far, BSE Mid Cap and BSE Small Cap rallied 81% and 97% respectively. In FY10, BSE Mid Cap was up 130% and BSE Small Cap 161%. Mahesh Patil, co-chief investment officer, Aditya Birla Sun Life AMC, said India is at “the cusp of a new cycle". “During economic recovery, mid-and-small caps typically do well and could outperform large caps. In the current environment, it would be best to take a three-year view as the economy and earnings would have normalized by then. From current levels, we can expect a 10-12% compound annual growth rate return for the Nifty," Patil said.

Analysts expect the market rally to continue in the current fiscal led by earnings upgrades, faster-than-anticipated economic revival, supportive global liquidity, and low interest rates.

“As vaccination in India commences on 16 January, we expect the demand recovery to gather pace. We also expect the government to prioritize growth in its forthcoming budget. After the sharp rally in the preceding three months, it is now important for corporate earnings to match expectations. Drivers of earnings are incrementally changing in favour of cyclicals," Motilal Oswal Financial Services said in a note.

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