The year 2017 has been a good one for the equity markets overall. While the index by itself gave very attractive single-year returns, the real action was in the mid-caps and specific stock stories. Let us look at some critical sectoral and thematic stories and see how they reflect on the market overall during the year gone by…
- Nifty Index (Annual Returns: +28.75%)
Had you purchased an index fund at the beginning of the year and forgotten about it, you would have still earned a healthy 28.75% returns. It was a combination of Trump trade, improving macro data, better quarterly numbers and hints at greater political stability.
- Nifty Mid-Cap Index (Annual Returns: +49.88%)
For the fourth year in succession, the mid-cap index performed extremely well during the calendar year 2017. In fact some of the biggest multi-bagger stories were to be found in the mid cap space. There were a few obvious advantages that these mid caps enjoyed. With low levels of leverage and highly focused business models, these mid-cap stocks enjoyed a natural advantage at a time when there is a premium on financial stability. Incidentally, while these companies did benefit from falling oil prices, their business models are not too vulnerable to macros like inflation, interest rates etc. Also, these stocks are not too dependent on FPI flows and have been relying more on domestic institutional and retail flows. It is, therefore, hardly surprising that these mid-caps have surpassed the large caps by a huge margin!
- Nifty Bank Index (Annual Return: +42.13%)
The Nifty Bank accounts for nearly 35% of the overall Nifty and hence has an oversized impact on the index overall. Two factors helped the banking index during the year. The focus on NPA recovery, the government commitment to recapitalize banks and the aggressive approach to NCLT has brought a sense of urgency to the PSU NPA problem. This has led to a good bit of positive re-rating for PSU banks. Private Banks carry greater heft in the Nifty Bank index. With most of the large private banks emerging as proxies for mega consumer plays, most of them have managed to give extremely good returns in the aftermath of demonetization.
- Interesting Consumer Plays (Auto: +28.76% and FMCG: +29.65%)…
Autos and FMCG give us the best representation of the Indian consumer demand story. Both these sectors had taken a big hit exactly a year ago when the demonetization was introduced. With the remonetization exercise giving a spurt, sales of autos and FMCG have recorded a sharp rise. Both have also had pricing power working in their favour. In fact, GST has been a game changer for the auto and the FMCG sector. They have been able to pass on lower prices to their customers leading to rapid expansion in their market share. In terms of market cap, stocks like Hindustan Unilever, Maruti and Britannia benefitted substantially during the last year. It is finally a return of the consumer stories and this trend could get accentuated in the coming year with greater focus on spending power.
- Global problem areas (IT: +12.53% and FMCG: -6.69%)…
While the IT sector did give positive returns on the back of a sharp bounce in TCS from lower levels, the sector still underperformed the Nifty by a huge margin. The problems for the IT sector continue. Global IT spending in the traditional BFSI space is shrinking and margins are coming under pressure. Growth is absolutely slack with most leading IT companies struggling to growth at more than 2% annualized. Recent changes in the H1-B visa rules and threats from the US to put the onus on corporates are only making the job tougher for Indian IT companies. The good news is that Indian IT companies are finally beginning to build their digital franchise with a greater sense of urgency.
Pharma was hit by two key factors. On the one hand, greater competition is compressing margins so Indian pharma companies are not getting the full advantage of drugs going out of patent. Secondly, repeated FDA investigations have also dampened the sentiments surrounding pharma stocks. Analysts and traders have been calling a bottom for pharma stocks for quite some time now, but it is becoming really hard to take a call.
So, that in a nutshell was the story of the Indian stock market in 2017. The Index continued to outperform other asset classes led by banking. Among the heavyweights the auto and FMCG sectors had a big impact on the markets. There have been sub-stories like real estate which performed well but they are still too small to make an impact on the index as a whole. For the year 2018, consumer stocks and mid-caps could continue to be the flavour of the season!