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Shah said the stock market is counting on the trend in corporate profitability

Wish you all a very Happy New Year.

Last year like a thriller plot. It was all about making the impossible, possible. Flows, Sentiments and Fundamentals were the three pillars on which our markets evolved in 2020. They made the ‘mother of bear market’ turn into ‘mother of bull market’ in just about six months.

Flows came from FPIs and from retail investors. FPIs pumped close to US$ 23 billion in 2020. In month of March, FPIs sold record Rs 60,000 crore. In turn in November and December, FPIs purchase was of Rs 60,000 crore per month each. This is a record that for two consecutive months the FPIs have purchased Rs 60,000 crore.

FPI buying was complemented by retail flows. Retail investor holding in market cap moved from 9% in Dec-19 to 9.8% by Sept-20. Between FPIs & retail investors, equity market may have seen an inflow of close to US$ 50 billion in 2020.

Sentiments kept improving month on month as business normalcy and economic activity resumed post lockdown. Falling of the active case post-Sept-20 also helped.

Flows and sentiments can be fickle. But corporate results in the Sept-20 quarter, and advance tax estimates for December 20, showed that fundamentals have improved significantly. In June-20, Nifty 50 company’s profits was roughly around Rs 46,000 crore. This was down by 49% on YoY basis and was explainable due to lockdown.

For Sept-20 quarter, the aggregate profit expectation for Nifty 50 companies was of Rs 75-80,000 crore. The actual numbers came way above at around Rs 1.10 lakh crore. This changed the valuation orbit for Nifty. The index was trading at around PE of 35x and fell to 25x on this run-rate. If we have to do crystal gazing, we believe that FPI flows will be supported by central banks from around the world who are boosting liquidity.

The G10 central bank balance-sheet now is crossing US$ 25 trillion. This record money printing by central banks around the world should keep up the liquidity. The central banks have also cut interest rates rapidly. We believe that high liquidity and low interest rates will support equity valuations.

Sentiments will be reflected through volatility. If 2020 was about virus creating volatility, 2021 could be about the vaccine related news. Good news about vaccine availability and effectiveness is that it may support the market. Any doubts, worries on the quality and coverage of vaccination will create downward pressure on the market.

Most important for market will be corporate earnings momentum. The September 20 quarter saw record profits for Nifty 50 and market. ‘Bears’ are of the view that Sept-20 results were one-off. The cost cutting due to salaries and wage reduction and reduction in advertising. Business promotion and discretionary spends were cut to minimum. ‘Bears’ view is that this can’t be sustained.

‘Bulls’ are of the view that Sept-20 profit was despite fall in sales. Now with business resumption, and normalizing sales, the margins can expand. Also the productivity gains due to tightened working capital, tightened manpower spending and tightened supply management, all will help margins. Our view is that some part of cost control will have to be reversed but most part will continue to reflect in margin. And we expect the corporate earnings momentum to continue in 2021 and support the market.

Many people believe that stock market and economy are getting delinked and stock market is ignoring the reality of market. We think that stock market is only discounting the positivity about the future courtesy flows, courtesy sentiments and courtesy improving fundamentals.