Nifty closed the year 2020 on the brink of 14,000. However, it was just a mere formality as the level got breached on 01-Jan. How did the Nifty get there?
Journey to 14,000
If you look at the annual returns on the Nifty index, it is around 14.5%. That is a reasonably good year in terms of equity returns. However, what this conceals is the sharpness of the fall and ferocity of the recovery. Between Feb-20 and Mar-20, the Nifty fell almost vertically from 12,200 to 7,610 due to the pandemic risks. However, from late March, the Nifty recovered almost 85% to close on the brink of 14,000. This rally in Nifty was largely driven by the huge liquidity surge and the FPI flows. It was not just Nifty, but even the mid-cap and the small-cap indices on the NSE and BSE showed similar impressive performance.
It was largely about liquidity
In the five months post the pandemic, the US Fed infused $3.5 trillion liquidity through monetary and fiscal measures. But the US was not alone. Central banks of the UK, EU, Japan, Australia, China and India loosened their purse strings. The overall liquidity infusion through the fiscal and monetary measures was as high as $20 trillion globally. Most of this money found its way into equities and the risk-on sentiments of the foreign portfolio investors post the US elections was a key driver for the Nifty rally.
A large chunk of hope too
If you thought that the Nifty rally was all about liquidity driven hype, just think again. There was a large element of optimism in the market too. GDP growth in Q2 had recovered much faster than expected from -23.9% to -7.5%. The real reason for the hope was the sharp recovery in corporate bottom lines in the Sep-20 quarter. While sales revenues may have been lower on a YOY basis, the net profits for the quarter were up by almost 140% on a YOY basis. That came on the back of aggressive cost controls. But, the biggest optimism was with respect to the reforms process. The apprehension was that the high fiscal deficit would induce the government to go slow on reforms. However, the fiscal stimulus 3.0 proved otherwise.
A sense of inevitability
A large part of the Nifty rally can also be attributed to the sense of inevitability about equities. There is so much money sloshing around that nearly 20% of debt issued by governments gives negative returns. That is OK for safety, but that does not earn returns. At the end of the day, global portfolio managers and pension fund managers need to make money work harder. That is possible only in high growth markets like India. With debt yields low, gold pricey and real estate uncertain; equities is the inevitable answer. That helped the Nifty rally in good measure in 2020! ©