The world greeted the positive news on the Covid-19 vaccine with a combination of applause, and relief. First, Pfizer came out with the news that the vaccine it was working on has shown 90% efficacy, based on interim Phase 3 trials. This was soon followed by Russian Direct Investment Fund (RDIF)—Russia's sovereign wealth fund—claiming that its vaccine too has, similarly, demonstrated 90% efficacy.
These twin developments have raised hopes of the Covid-19 pandemic being contained, if not eradicated, and normalcy gradually returning to people’s lives. In a latest research report, the financial services firm, Nomura argues how the development of the vaccine can further the objective of normalisation, as it holds out the prospect of preventing infection, limiting spread and reducing infection severity.
“The development is positive for equities, in our view, as it improves risk sentiment against the backdrop of strong liquidity and sustained capital flows,” says Saion Mukherjee and Neelotpal Sahu, the Nomura analysts who penned the report.
This upped risk sentiment has already started reflecting in the foreign portfolio investment (FPI) inflows during the current month. If one compares the FPI flows during the first half of November, for the last five years, the total inflows of ₹34,883.85 ($4.7 billion) this year are a record high. Compared to ₹19,250.59 crore ($2.71 billion), the absolute increase in the first half of November this year is over 81% in domestic currency terms and 73.43% higher in U.S. dollar terms.
The Nomura analysts highlight that, in U.S. dollar terms, India has been the fourth-best performing market for 2020 on year-to-date basis, among its peers, led largely by price to equity rerating, despite significant downward to near-term earnings estimates. “Foreign flows have supported Indian equities,” the duo added as they ascribe a target of 13,640 on the NIFTY 50 for December 2012. The implied upside of 7% carries an upside risk on the back of strong capital flows.
Impact of the U.S. elections
Covid-19 vaccine apart, November 2020 has other sentiment boosters at play too. The U.S. presidential elections and its outcome is one of them. While the Democrats, led by Joe Biden, have won the election and control the House of Representatives, the U.S. Senate will be controlled by the Republicans.
According to Viram Shah, CEO and co-founder, Vested Finance, there will be run-off elections held for 2 seats in Jan. 2021 which could give the Democrats control of the Senate. And, if the Democrats do not win the run-off elections they need to wait till the 2022 mid-term elections to regain the Senate. “This means that the Democrats will not be able to pass new policies easily,” says Shah. “This is good for the markets as there will not be any sudden large shifts in policies.”
In terms of the impact of the U.S. elections’ on the Indian markets, Shah says that there may not be any large sectoral impact. In Shah’s view, the U.S. Federal Reserve keeping interest rates low will mean that we could see increased foreign investor inflows into India as these investors look for yield outside of the U.S.
Much to Shah, Nish Bhatt, founder & CEO, Millwood Kane International—an investment consulting firm—too feels that a stronger bilateral relationship with the U.S. under the new administration will help Indian businesses. Bhatt points out that President-elect Joe Biden's plans to reverse most of the tough decisions taken by the Donald Trump on visa and immigration plans, to increase the H-1B visa limit, and remove any country quota for green cards is a big positive for Indian IT companies. “Biden at White House means less protectionism, a sign of ending tariff wars,” says Bhatt.
Further, in his view, the market is rallying on hopes of fewer regulations and a bigger stimulus package under Joe Biden, as the U.S. economy needs a fresh stimulus package for a revival. “India seems to be in a sweet spot and may gain as the U.S. under Joe Biden is unlikely to ease pressure on China,” Bhatt adds.
Other factors
Back at home, the Bihar assembly election outcome has been the other sentiment booster for the Indian markets. According to Gautam Duggad, head of research at Motilal Oswal Institutional Equities, defying the consensus verdict of exit polls, along with defying the strong 15 year anti-incumbency—the National Democratic Alliance (NDA) managed to retain Bihar with a wafer thin majority—126 seats out of 243.
In Duggad’s view, the most important political conclusion result of the first state election in Covid-19 times is that the difficulties unleashed by the pandemic—joblessness, loss of business, economic slowdown—has not politically hurt the NDA, at least not yet. Particularly, the pandemic-led migrant crisis saw the mass comeback of people to Bihar, despite that if NDA managed to retain Bihar, Duggad goes on to reason that it might indicate the massive disruption in people's lives might not have dented prime minister Narendra Modi's popularity in Bihar, especially in a context when the NDA had won 39 out of 40 seats in the 2019 general elections.
The other big plus for the markets this November was the rejigging of the MSCI Emerging Markets (EM) index. According to Nirali Shah, senior research analyst at Samco Securities, the anticipated increase in India’s weight in the EM index from December could be the reason for hefty purchases in private sector banks, which were slow-coaches in the entire rally. On the contrary, PSU banks witnessed lacklustre buying signifying that this momentum is a fractured rally and once the index rejig is completed, markets are likely to pacify and enter into a prolonged correction, Shah warns.
Towards the end of the pre-festive week, the central government also came up with its much awaited stimulus package, which seems to have failed to excite equity markets. According to Shah of Samco Securities’, the total relief measures announced by the central government and the Reserve Bank of India (RBI) have totalled ₹29.87 lakh crore, or 15% of India’s gross domestic product (GDP).
“Despite of such hefty domestic stimulus, it is reckoned that the primary fiscal impact on the overall GDP might be in lower single digits as direct benefits to the common man appear scanty,” says Shah. While other developed countries who had actually managed to spend upwards of 10-15% of GDP are still struggling for economic revival, India seems to have already marched to its pre-Covid-19 levels with its manufacturing purchasing managers' index (PMI), new record high levels of fuel consumption, and stock markets. “It appears to be a blessing in disguise that India has sailed through the pandemic without putting much pressure on its fiscal deficit,” Shah adds.
Market participants hope that the new life-high of 43,708.47, seen on the 30-stock S&P BSE Sensex on November 11, is for real and not a trigger for corrections. After all, the new life-high is a jump of 18,069.57 points from the year’s low of 25,638.9 points touched earlier, on March 24 this year. This 70.48% positive correction is a record of sorts, however, the problems facing the larger economy are far from over.
