Stock Market Newsletter – June 2020

As Mark Cuban (of Shark Tank & Dallas Mavericks fame) said “If you don’t follow the stock market, you are missing some amazing drama”. After a shocking 29.3% decline in March, followed by a mind boggling 19% return in April and a non-damaging -2.84% return in May, Nifty50 was back to its winning ways, with a 7.53% return in Jun 2020. For the quarter as a whole, Nifty50 gave investors a well-deserved 24.40% return. As the government opened up the economy in pockets, giving way for companies to start operations and provide services across many states, several leading indicators of economic performance showed a commendable uptick. On the other hand, the spread of Corona Virus took a bad leap in numbers, owing to lax social distancing norms among citizens.

At the beginning of Jun, at a global level, India was in the 7th position on total cases at 194,700 with total deaths at 5.495, recoveries at 93,343. Currently, as I write this article, India stands at 4th position with 685,000+ confirmed cases,and new cases crossing the 25,000 mark in a day. Very alarming indeed!

Bajaj Auto, which opened its facilities for production at the start of Unlock 1, recorded 250 positive cases already, with worker unions asking for closure of factory to prevent the spread of infection. There is a possibility of many companies continuing their work at sub optimal levels or opting for a shut down if a similar situation persists for a few more weeks. This doesn’t augur well for the economic prospects of India, considering that Q1FY21 would be a washout to a great extent and the healthy GST collections of Jun would taper down again. GST collections in June stood at Rs 90,917 crore, up from Rs 62,009 crore mopped up in May and Rs 32,294 crore in April, totalling Rs.1.85 lakh crore for the 1st quarter but a 41% drop in comparison to the Rs.3.14 lakh crore collected in the same period of FY20.

The other major headlines of June included the China-India standoff on the border issue, which still continues to be volatile, with a substantial build-up on both sides. In retaliation to these skirmishes, India, on its part went ahead and declared a ban on 59 Chinese apps. In addition, trade policies with China are being reworked, with a plan to ban imports of products and services which can hamper India’s national security and strategic interests – especially in the areas of telecom, power, and other consumer-oriented sectors. While this could put (supply side) pressure of some of the Indian firms importing raw materials and semi-finished products from China, the Indian government is insisting on firms to either become Atmanirbhar (Self Reliant) or opt for imports from other countries. On the other hand, the nationalistic fervour induced due to this stand-off with China could put focus on Indian Public Sector Enterprises (PSE), which have been operationally inefficient & neglected over many years.

Another headline grabbing news was the unheard-of increase in petrol and diesel prices for 21 consecutive days. As of Jul 05, petrol costs Rs.80.45/litre in Delhi, while diesel costs Rs.80.53/litre. It was a historic occasion, as it was the first time ever that diesel prices crossed petrol prices, putting pressure instantly on diesel passenger vehicles. Consumers will have a lot to think about purchase of diesel vehicles further or even petrol, especially at a time when auto sector is beholding a poor demand scenario. Not an encouraging sign for an auto sector revival or inflation control.

Coming back to stock market news, Turkish and Argentine markets returned more than 9.6% for the month, trailed by the two major Indian indices at ~7.5% and closely followed by Borsa Italiana, the Italian national stock exchange at 6.47%.

While Nifty50 clocked 7.53% returns in Jun, all sectoral indices ended in the positive, led by Nifty PSU Bank index with 26.38% return. Nifty Media, Nifty Realty, Nifty Bank were the other performing indices with more than 10% returns. For Q1FY21 as a whole, Nifty Pharma and Nifty Auto clocked 44.80% and 43.91% respectively. Energy, Infra, metal and media were the other Nifty indices which clocked over 30% gains. The Nifty Volatility Index was down by 59.5% for the quarter, after rising 165% over the last 6 months.

On a provisional basis, though FII inflows weren’t higher than the previous month, fund outflows were restricted to only 10 out of 22 trading sessions of the month.While DIIs also sold on 10 occasions, outflows were muted in comparison to the inflows. Net-net, the total of FII-DII purchases in the cash segment totalled Rs.7900 cr.

After witnessing a minor drop of Rs.2.35 lakh crore in May, the market capitalization of BSE listed companies in June rose by a substantial sum of Rs.12,09,160.89 cr.

The performance of Nifty50 in June was drawn from its constituents, with 39 of the 50 stocks ending with positive returns. Bajaj Twins were the out performers with 44.91% and 32.70% returns respectively, while Zee Entertainment and Coal India ended with negative returns of ~ 6%.

On a quarterly basis, it was surprises galore. 5 of the top 10 best performers of Nifty50 for Q1FY21 were from the auto sector – M&M, Hero Motocorp, Eicher Motors, Bajaj Auto and Tata Motors. It was an outstanding quarter for M&M with a return of 79% followed by metal stocks – Vedanta and Hindalco.

But Reliance Industries was the cynosure of all eyes, for its historic and never heard before fund-raising proficiency, anywhere in the world. With a debt burden in excess of Rs.3.36 lakh crore, the Chairman, Mr. Mukesh Ambani pledged to make Reliance Net Debt free before the end of FY21 and he is on track to achieve it, much before the stipulated time. Over a span of 10 weeks, aided by a dozen deals from renowned technology companies and global investors, Reliance sold 25.09% stake in Jio Platforms for a sum of Rs.1.17 lakh crore, pegging Jio Platforms’ equity value at Rs.4.91 lakh crore and an enterprise value of Rs.5.16 lakh crore.

The incoming dollar flows were absorbed by Reserve Bank of India (RBI) and hence, India’s foreign exchange reserves crossed the US$500 bn mark for the first time. India had forex reserves of US$501.7 bn as of June 5, a rise of US$8 bn in a week. By Jun end, forex reserves had swelled to US$506.8 bn, a noteworthy achievement considering their pitiful state in 1991.

The Indian Rupee depreciated from 75.605/US$ from the beginning of the month to hit a high of 76.40/US$ by 18 Jun, only to recover and end the month at 75.545/US$.

An exciting month for investors indeed. What does July hold for investors, stock markets and the economy at large?

Post Unlock 1 announcement, production across companies has increased, with some sectors at ~90% of pre-COVID level. While urban centres continue to have restricted movement, rural and tier 2 towns & cities continue to do better. With a bumper harvest in the earlier crop season and good Minimum Support Prices (MSPs), farmers are expected have better incomes and thereby consumption demand is expected to rise. However, corona virus outbreak hasn’t subsided yet and India reported 25,000 cases in 1 day. Not a good sign from the perspective of health of citizens or the envisaged economic revival. Q1FY21 results season is upon us and considering the fact that this quarter had 45 days of stringent lockdown measures in force, expectations need to be muted (to dismal) in general. Over the last 11 years, Nifty50 had very few bad years in terms of July returns however, assuming any trend would be futile, owing to the various issues plaguing the market and economy at large.

Tempered enthusiasm, coupled with cautious optimism is the way forward. As Peter Lynch said, “The real key to making money in stocks is not to get scared out of them”.

Stay healthy, stay safe and invest better.

Happy Investing!

Gopal Kavalireddi

Gopal Kavalireddi

A data maverick on the loose! 24/7 research, analyzing the stock market upside down and from the inside out. His vast educational accomplishments and 2 decades of in-depth experience from the corporate world helps to join the dots when it comes to investing in stocks. You can expect well-researched themes/portfolios, not stock tips!

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