Weekly market review by Hemant Kanawala, Head - Equity, Kotak Mahindra Life Insurance Co. Ltd.

Market characteristics point to sustained performance

A combination of strong upturn in business prospects of IT services firms, anticipated government stimulus ahead of festive season and expectations of favorable ruling from Supreme Court on interest during moratorium period, propelled the markets over the last week. Nifty returned 4.4%% while midcap index performed benignly returning 0.7%. Nifty is only ~5% away from the market high seen pre-COVID. A combination of: a. broader market outperformance; b. recent outperformance in metals and c. improved sentiments in banks and financials makes us believe that the market is well poised to cover all ground lost due to COVID-19. Over the last week foreign institutions deployed ~USD 265 mn, while domestic institutions withdrew ~USD 22 mn. The recent rally has increased market P/B ratio to 3.32x, closer to the long term average of 3.5x.

On macroeconomic side, incoming data for the month of September has been positive and suggestive of improving economic activity. PMI Manufacturing surged to highest level in eight years to 56.8 from 52 from Aug-20. Likewise, GST collections for month of September, 2020 were recorded at INR 955 bn-, highest since lockdown began in March. The collections were 10.4% higher on MoM basis and 4% higher on YoY basis. RBI in its October credit policy kept the policy rates unchanged but assured the market of accommodative stance. It announced number of measures to improve liquidity to financial institutions and support growth.

Exhibit 1:  Sept Manufacturing PMI surges to 8 year high

Banks, financials and IT lead market rally; energy and consumer goods lag

Banks (7.1%), financials (6.8%) outperformed strongly, largely due to anticipation of favorable pronouncements from the Supreme Court on the issue of interest during loan moratorium. IT (5.3%) outperformed due to much improved business prospects of IT services companies as evidenced by strong results and very positive management commentary from TCS. Energy (-0.7%) underperformed due to lower realizations for upstream companies due to weak crude and suppressed refining and marketing margins for the downstream players. Consumer goods companies are still inching closer to their pre-COVID level business and facing slower recovery, which reflected in sector underperformance (-1.0%).

Exhibit 2:  Banks, financials and IT lead the recent rally; while energy and consumer goods lag

Exhibit 3: Market rally is pulling Nifty P/B close to its long term average