For August, there was a disconnect between the Sensex returns and portfolio returns. August saw the highest gain by Sensex and Nifty for 2021, yet many investors portfolios did not see a similar kind of buoyancy. The main reason is that Mid and small caps counters came under heavy profit booking. The advance-decline ratio was less than one, suggesting that despite Sensex surged by 9 per cent, more companies declined than advanced in August.

The market has been moving up many months in a row. No markets in the world can maintain or sustain this kind of pace for the longer term. Since March 2020, when market sentiments were hit by the Corona crises only two times, India’s market cap was lower than the previous market cap suggesting that the rally has been one-sided. India’s market cap was Rs 125 lac crore in April 2020 (Jan 2020 Rs 155 lac crore) and now surged to Rs 250 lac crore. It got doubled in the last 17 months! Hence Indian market needs corrections. We saw healthy intermittent corrections in the market when Sensex surged from 2000 to 20000 levels from 2003 to 2008. In the same way, we need healthy correction if this market wants to continue its upward journey for a longer period.

Profit booking in Mid and small caps

After many months Mid and small caps underperformed the larger companies. While many experts blamed the BSE circular for the corrections in mid and small caps, I feel the market needed a reason for the corrections and BSE circular offered that as an excuse. BSE circular mentioned that the new restrictions on buying and selling would apply only to companies exclusively listed on the BSE. That means circular applied to very few sets of companies. Many are now wondering should they switch from Mid and small caps to Large-cap? My answer is no. Historically Mid and small caps accounted for 15 per cent of India’s market cap. Despite the last 17 months rally, Mid and small-cap account for less than 10 per cent suggesting there is enough headroom for them to grow. Of course, many would see profit booking, but overall mid and small caps will continue to outperform. Hence it would be best if you continued to remain exposed to Mid and small caps.

Sector rotation

We have always observed that when sentiments go soft, investors move to FMCG. Exactly that happened in August. FMCG index emerged as one of the best performing sectors as there was some risk-off strategy coming back in the market due to profit booking. On the other hand, the realty index was the best performing sector in July but was at the bottom of the table in August. The metal companies also saw some amount of profit booking due to news flow from China. But going by the price trend in the metal space, it’s very unlikely that the rally in the metal space is over. Demand for metal remains strong while supply cannot respond to rising demand, pushing prices high. Almost all companies from the metal sector would report handsome growth in their financials for the September quarter. Another good thing is that many of them use this upcycle to reduce debt from their books, making their balance sheet healthy.

Result season

June result season got over last month with QoQ sales decline of 8 per cent, and net profit declined by 12 per cent. One common feature of the result season was that companies could not pass on higher input costs to end consumers, taking a beating on their margins. But each company is optimistic about growth for the balance three quarters provided the third wave of the virus does not disrupt economic activities again. Based on June 2021 numbers India Inc trailing 12 months profit stands at Rs 8.06 lac crore. The market cap of Rs 250 lac crore gives India Inc a P/E ratio of 31x. The market is sustaining this higher PE in the hope of higher growth in the earnings and liquidity, which is expected to remain strong, especially from retail investors as they have very few other avenues to invest in.

Taper Tantrum no longer the threat.

In the last few months, the market struggled to understand the impact taper tantrum would have. Everyone drew their experience from the 2013 episode, which then made the market nervous. But Powell comment did not create any panic selling in the market, but on the contrary, the market moved up. Fed is likely to start unwinding from the end of 2021 but did not clarify the quantum of unwinding. But one thing is sure that Taper Tantrum is no longer threat to market sentiments.

What should we expect in September?

Now, that brings to the very interesting question on what one should do in September. The market normally corrects whenever the main index goes up, but the advance-decline ratio is less than one. One can expect some selling pressure in September. Is the correction good or bad? I would say that correction is extremely good. The correction is healthy for the market to take the next big up move. So don’t panic when corrections happen. Use that as an opportunity to add more. The Indian market is poised for a mega bull run for the next five years, with many healthy corrections in between.