These are the most frequently asked questions to any investor. I analysed NIFTY 50 with the same approach of how I analyse individual companies and found the following:
Analyzing earnings:
The markets were at all-time high in Jan 2020, when NIFTY was at 12352 and EPS was at Rs. 431 and then, entered the bear territory (i.e. falling more than 20-30%) in no time and made a low at 7500 in March 2020. It is regarded as the fastest fall in the history of stock markets. Now, in July 2021, NIFTY 50 is at 15700 and EPS is at Rs. 560.
NIFTY 50 doubled in a very short span of time from the lows. That is why one tends to think that the market is overstretched and that the market has risen way too much. Also, at time when we see that the actual reality (lockdown) is in contrast to what has been happening in the markets.
Essentially, the market has grown by 27% and earnings have increased by 29% in the aforementioned period. The growth in market is in tandem with earnings.
The case of COVID-19 should definitely be a part of economics text-books in future teaching interesting economic concepts. How one virus has managed to derail the economy and at the same time also managed to accelerate some trends which would have otherwise taken few more years to establish. It’s been a year of supply disruptions. Some are transitory in nature while the others look structural. Some of the changes or key trends that I see:
- The pandemic led to consolidation in suppliers in various industries.
Demonetisation and GST started the trend of organised market gaining market share from the unorganized market. The COVID crisis accelerated this trend.
For instance: Textiles sector
Some part of the value chain is unorganised in this industry. Going forward, buyers would want strategic vendors, so they are consolidating their vendor base. Hence, the larger companies will become larger and boost their earnings at the expense of the smaller ones.
This scenario is seen in various other industries too like tiles, manufacturing materials etc.
- The crisis led to supply chain re-alignment (China+1 strategy)
COVID-19 manifested the adoption of this strategy at a faster rate which was already happening since last two years.
This strategy is just not confined to China+1 but also that no one country will occupy the largest share in the supplier sourcing list.
Also, in metals (Aluminium and Steel), China cutting down on production in primary metal due to environmental reasons and increasing imports led to rise in metal prices resulting in increased profitability of these companies (one of the factors). I believe, China would want to gradually cut down on primary production of metals/commodities on account of:
- Reducing pollution and carbon footprint and
- I believe, China would now make a transition towards value added segment to witness improved margins and primary production cycle is running at peak. This is gradually, being seen in the results and conference call takeaways of many global companies too.
Similar, type of cycle is seen in paper and chemical industry too.
- Government initiatives to focus on domestic production and import substitution
There are key policies and government initiatives taken towards import substitution to boost domestic production.
For instance, PLI scheme in air conditioner components, imposing import duty on products like solar glass etc to incentivise domestic production.
- Environment Concerns: Looks like a Sunny Future for the Clean Energy Space
The momentum of adopting the green energy has build up in last 4-5 years and the next 5-6 years might be the accelerated phase in renewable energy sector in India and globally too. It is very likely that clean energy revolution is here and state and national governments are at forefront trying to make a difference. This perception is based from a mixture of past favourable policies, regulations, incentives and innovations in the power sector.
- Technology, Chemicals and Pharmaceuticals were another outperforming sectors during that time.
All these sectors contribute to almost half of the constitution in NIFTY 50. NIFTY 50 is a basket of top 50 companies. Hence, it had to increase. Isn’t it ?
Also, often we get to hear that it’s a liquidity fuelled rally led by low interest rates and FDI inflows have contributed significantly to the rally. It is absolutely correct but when the growth has been in tandem with the earnings, can we say the markets look overstretched?
A very simple concept and in the era of social media and instagram reels, its highlighted even more that inflation silently kills your purchasing power in long term if not invested efficiently. If we are experiencing rise in metal, sugar or any other commodity prices, by investing in these companies provides us a hedge. If the profitability of these companies increase, the stock price will also increase resulting in good returns. I am not recommending to take exposure in these sectors. Do your own research and consult your financial advisor before taking any investment decision.
Currently, markets don’t look overpriced but stock markets are forward looking. Need to watch out for the third wave and its impact. I am not giving any short term view. Find your pocket of growth sector, allocate and move on. As they say, there is bull run in some sector irrespective of the volatility in markets.
Happy Investing!