The Covid-19 pandemic has changed our lives like never before. And for those following the equity markets, it has been nothing short of a roller-coaster ride. The pandemic and the ensuing lockdown in India, understandably, gave a body blow to the economy. However, the indices displayed volatility, before breaking into a bull run, as if immune to the ravages of the Black Swan event. Sample this: On March 24, 2020, the S&P BSE Sensex touched the year’s low of 25,638.9 points—down 16,635 points (falling over 39%)—in just 46 trading days since the then high of 42,274 points on January 20, 2020. And just 226 trading days after March 24’s low, the Sensex, on February 16, 2021, touched its latest lifetime high of 52,516 points, recovering nearly 26,878 points, or nearly 105%.

What led to this recovery? Beyond news of the Covid-19 vaccines, recent improvement in corporate performance also acted as a strong booster for investor sentiment. According to Kenneth Andrade, founder and chief investment officer, Old Bridge Capital Management, a Mumbai-based portfolio management services firm, the bounce back of Indian companies has been significantly better than anyone had anticipated. On the ground, feedback reveals that corporates are witnessing demand like they have never seen before.

Image : Graphics by Rahul Sharma

“Everyone had already cut costs and then you had the bounce back in demand which companies were struggling to fulfil,” says Andrade. He foresees the March 2021 quarter being no different from the previous two, when companies reported strong performance. “If the trend continues, companies are going to reset the profitability table upwards.”

Image : Graphics by Rahul Sharma

Singapore-based Mark Matthews, head of research–Asia, Julius Baer, sees the Sensex growing 15% to touch 54,000 from the early March 2021 levels. In a recent note, Matthews says that an economic recovery is underway in India, where he sees 9% annual GDP growth this year, followed by 7% next year. “We look for earnings per share to grow on average over 25% over the next three years,” Matthews notes. “It would be unprecedented for the stock market to fall in an environment of such strong growth.

Pandemic Uncertainties

India was witnessing moderation in economic growth before the pandemic hit. But Covid-19’s uncertainties, and its likely economic impact led to major fluctuations not just in the indices, but also in the net equity investments of foreign portfolio investors (FPIs) and mutual funds (MFs).

For example, in March last year, while MFs registered net equity inflows of ₹30,286 crore, FPIs recorded their highestever monthly outflows of ₹61,973 crore. However, in the past 12 months, March 2020 was one of just three months which saw net FPI outflows: the other two being April 2020 with ₹6,884 crore, and September with ₹7,783 crore. During the 12 months since March last year, FPIs have pumped in ₹2.02 lakh crore into equities.

Contrast this with MFs, which have been net sellers of equity in 10 of the past 12 months, registering net outflows of ₹95,219 crore till February 2021. And last year, in November and December, MFs saw combined net outflows of ₹57,188 crore, while FPIs saw net inflows in excess of ₹1.22 lakh crore.

FPI inflows, in fact, also acted as a booster for the equity markets. Pointing towards FPIs’ equity inflows of $23 billion since October last year, Matthews explains that foreign investors typically invest in India for its growth attributes. “The earnings recovery forecast by analysts needs to be sustained, in order to justify current market levels,” he, however, warns.

Image : Graphics by Rahul Sharma

According to Andrade, going forward the FPI flows could be volatile, but India would be in a favourable position. In his view, any sell-off in the U.S., or the developed markets, will benefit emerging markets. “I would expect secular FPI inflows, not ruling out intermittent periods of outflows due to volatility in the U.S.,” he adds.

A key global risk, going forward, is the rise of inflation in the U.S. which could have an impact on bond yields and, in turn, on equity markets. In Andrade’s view, taper tantrums are not a new thing for the investing world. And if that happens, every global asset class would be affected.

While India has to be prepared for the volatility as any other economy, Andrade would want to look at it a bit differently. “Do you sell into that fall or reposition yourself then is the key question to address,” he says.

For investors, that is the question that will define their portfolio going forward.

(This story originally appeared in Fortune India's April 2021 issue).

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