2020: The year of Pharma, IT and Strongest Franchises

I am writing after a long time as I utilized the second half of this year in analyzing the equity markets in India and decided to write only when I have something insightful. The way the markets have ended this year, it has helped me sum up my learnings which might be of interest to some who invest/trade/follow the markets. I did not want to superimpose my perception/beliefs/judgement on the data that markets have thrown up hence this article will be short and will purely replicate what the market participants have witnessed this year. The following have been the learnings from the performance of benchmark indices(Nifty 50) observed over a period of 12 months and 3 months:

Consistent Performers: Many believe that this year belonged to IT, Pharma and Cyclicals. Nifty 50’s (Benchmark) performance vis-a-vis its portfolio companies validate this thinking as IT and Steel sectors have outperformed benchmark over last 12 months as well as in the last 3 months thereby contributing to Nifty touching its lifetime high of ~14,000. But this year has also been (like any other year) of strong franchises like Asian Paints, Titan, HDFC Bank, Bajaj Finance and Kotak Bank (I can’t comment much on Adani Ports as its historic financials have been dismal and there is no data to suggest its steady out performance this year). Despite the Nifty Bank under performing Nifty 50 by more than 10%, these strong financial franchises have beaten the Nifty 50 in last 12 months (a 2% dip for HDFC Bank is not considered significant) and the recent 3 months. It is unfortunate that Nifty 50 doesn’t have other strong franchises like Pidilite and Berger Paints which have also beaten the Nifty 50 by some great margin

Resilient Throughout the Year: Some big names in Pharma, Cements have not been the star out performers like their peers but have managed to beat the Nifty 50 during the 12 months while lagging it in the last 3 months. This either suggests that they have just gained as their respective sectors managed to outperform the index or that these stocks are fairly strong franchises which would not climb the mountains in a bull run nor will fall deep into the ocean during a bear run. Companies like TCS, HCL Tech, Cipla have validated this hypothesis in the last decade. Consumer Goods continued to be a defensive sector with strong franchises like Nestle, Britannia and HUL managing to beat the index again this year but failing to contribute to the recent rally. Hero, M&M and Reliance outperformed the Nifty 50 for the year despite their respective sectors facing strong headwinds for very specific reasons. (Offtake of tractors and 2 Wheelers increased due to boom in Agriculture which favored the likes of M&M and Hero while Reliance climbed on positive sentiment around its historic fundraising for Jio)

Short Term Performers. Beware: Some stocks have thrown a surprise this year. Their annual performance has been dismal, trailing the Nifty 50 anywhere between 15% to 54% yet in the short term, they have contributed the highest in taking Nifty 50 to record highs. These names are either lenders or PSUs both of which should ring alarm bells in investors’ minds. The difference b/w their under performance and out performance over Nifty (in 12 months and 3 months) is upwards of 24% and goes as high as 100% and nothing has substantially changed for these sectors/companies in the last 3 months. So its cheap money chasing them and helping them run. Any pullback in Nifty 50 will begin and end with them being at the receiving end.

Consistent Laggards: This again is the story of 2 sectors and has been for quite sometime now. Autos and PSUs. Recovery in automobile sector is still some months away, brands like Eicher Motors are facing the heat due to premium products while Maruti is suffering from low return on capital. PSUs like BPCL and Power Grid are a true reflection of their long standing performance history in stock markets. Give the markets another 3–6 months and one will see other PSU stocks of Nifty 50 joining this bandwagon. Life Insurance has been a laggard in a year of pandemic which is a surprise but the pandemic will surely push a larger population to purchase insurance as the cashflows are robust, governance is not an issue hence one should expect this sector to outperform in the coming years

Despite all the analysis and the strong sectoral tailwinds seen this year which pushed many Nifty 50 companies to outperform, one single theme remains consistent. Irrespective of the sector, strong franchises have outperformed the benchmark yet again despite witnessing staggering lows in March 2020 and a GDP/sectoral degrowth for 2 consecutive quarters. Lastly, all the Companies which have outperformed the index this year (not in the last 3 months) have done so on the basis of growing profits this year which reaffirms that without profit growth, the stock will not grow in the long run.

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Inspired by stories, people and current affairs

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