Broader Market Indices May Outperform Benchmark
FY2021 has been one of the most action-packed years after FY2009 in all aspects, be it social, economic, financial, ecological, scientific, or geopolitical.
Despite all the adversity, bulls emerged as the clear winner in FY21 as Nifty logged gains of nearly 71 per cent. What made it further interesting was the fact that the equity market rally in FY21 was more broad-based and after underperforming for two years, the broader markets not only participated in the rally but also, outperformed the benchmark indices (as Nifty Mid-cap and Small-cap jumped 102 per cent and 126 per cent, respectively).
Another striking aspect was that during FY21, the Indian equities outperformed their western counterparts aided by huge liquidity thrust as FIIs pumped in a massive amount of over Rs 2 lakh crore in FY21. Meanwhile, expectations in economic recovery, which further gained grounds on government schemes like PLI, Atmanirbhar Bharat, and improving corporate profitability was led by lower operating expenses and lower interest cost. However, of late, a lot of shimmer of optimism has started to fade away as India is in the grip of the second wave of the virus and what is more concerning is that the key driver of the stellar rally, which was liquidity inflow by FIIs, have started to see signs of fatigue.
Further, the rising bond yields and dollar index scaling to multi-month peaks is like rubbing salt into the wound for Indian markets. And if yields continue to firm and the dollar index strengthens from here on, the risks of the exodus of capital loom large for almost all the emerging markets altogether. While these developments could result in some profit booking in the near term, this would only make Indian markets healthy as we haven’t seen any meaningful correction after the stellar run from March lows.
The latest update from the US is that its President Joe Biden has unveiled over USD 2 trillion plan which aims to revitalise the economy. The key focus area of this plan is to spend on roads & bridges along with high-speed internet infrastructure and water pipes. The White House plans to fund the bill by reversing some of the tax cuts which Republicans gave corporations and the rich, four years ago. The tax hikes could act as a blessing in disguise as higher taxes probably limit future inflationary pressure, and it could even help bond yields to stabilise.
The Indian markets started off FY22 in a buoyant mood on the back of announcements of the US President. If we go by the seasonality analysis, April has been a good month for the Indian equity markets as on average, Nifty recorded gains of nearly 2.5 per cent in the month of April while the data taken into consideration is from 2002.
What is more electrifying is the fact that Nifty Midcap 100 and Nifty Smallcap 100 have delivered average gains of 5.2 per cent and 4.4 per cent, respectively in the month of April (Nifty Midcap 100 performance is calculated from 2006 while Nifty Smallcap 100 performance is calculated from 2012). So, this is in line with our view as we expect the broader markets would continue to perform well, while the index may continue to trade in a broad range in the near term.
Wondering as to why are we saying that the broader market could relatively outperform the key benchmark indices in the coming weeks? To begin with, Nifty Mid-cap and Small-cap indices are trading well above their gaps, which were created on the following day of the Union Budget 2021, whereas, Nifty has already filled that gap. Further, Nifty Mid-cap and Small-cap have retraced only 50 per cent of the upmove since the Union Budget day, whereas, Nifty retraced 61.8 per cent of the upmove during the same period. Both the indices have recently taken support around the 50-EMA and in the past, on multiple occasions, both the indices had formed a higher base near about the 50-EMA since June 2020. In addition to this, both the indices have maintained the rhythm of not correcting more than 10 per cent since March 2020 lows. Considering the above factors, we expect both the indices to regain an upward momentum and in the due course, maintain their relative outperformance against the key benchmark indices in the coming weeks.
