Nothing describes 2020 better than this line from Charles Dicken’s classic “A Tale of Two Cities”. In his 1859 classic, Dickens talks about the contradictory events in England and France, during the French Revolution. The story revolves around London and Paris. London was described as having the “best of times”, owing to its peace and prosperity while Paris as having the “worst of times” due to unrest and tyranny owing to the French Revolution. The novel also has several other comparisons and contrasts with respect to its characters, personalities and society at large. More on the classic English book some other time, but 2020 was among the most contradictory times that we have seen in recent history for market participants.
“Once-in-a-lifetime” global healthcare crisis,
“Once-in-a-decade” stock market crisis,
First-ever recorded GDP contraction for the Indian economy
Ended the year with “lifetime-highs” for NIFTY and SENSEX.
2020 was a year of Death, Despair and Decline and also Recovery, Resilience and Resumption.
We begin this newsletter by taking a look at the events that shaped market movements in 2020. We will then look at sectors/stocks that emerged winners. Most importantly, we will leave you with significant financial trends that can shape the next few years. Lot of interesting stuff inside, so read on!!
2020: What An Eventful Year It Was!
Some of the key events that shaped 2020, in alphabetic but not necessarily in the chronological order were:
American elections: Biden “trumps” elections
In a bitterly fought election, Joe Biden defeated Donald Trump to stake his claim to become America’s 46th President. Though very important for America and the world, this event did not have much impact on stock markets, barring some volatility. This is because the official change in the Presidency will happen only in the early part of January 2021. A hung house could have hurt markets more. Markets quickly turned their attention to vaccine development, effects of second COVID wave and Trump’s $900bn relief package.merican elections: Biden “trumps” elections
Brexit: Divorce, finally!
After months of hard negotiations, the UK decided to leave the EU in Jan’20. This kept markets on tenterhooks as the nature of this divorce was unclear. 2020 was supposed to be “transition period” for the deal to be finalized. The verdict remains divided on whether the final deal is favourable or adverse. However, if market movement is any indication, then things seem to be okay. UK benchmark index FTSE 100 has seen a steady rise since “post-Brexit”, and the post-Christmas break is any indicator. GBP has been steady vis-àvis USD.
Crude volatility: Negative prices, duh?
2020 started on a volatile note for crude oil as Russia and OPEC flexed muscles against each other, leading to fluctuations in price. The subsequent lockdown and lower economic activity globally led to negative crude oil price in Apr’20, a phenomenon that was never seen before. This scared market participants, with indices across the world immediately seeing significant intraday losses. However, crude was well-behaved in the second half of CY2020, remaining range-bound between $35 and $50.
Deluge of liquidity owing to monetary easing and stimulus packages
In a bid to support flagging economies globally, Central Banks across the world eased policy rates in 2020. Fed’s announcement to keep rates lower for longer became famous. The current 10-year government bond yields in developed economies are lowest ever (US: 1.1%, UK: 0.3%, Germany: -0.5%, Japan: 0%). The decline in interest rates leads to a PE (Price to Earnings multiple) rerating for equites. So as long as interest rates remain soft, PEs would remain elevated.
Also, globally, the Governments had committed $14tn in the fiscal stimulus, which is 3.5x the hole created in global GDP (~$88tn) because of the pandemic. And this is probably what markets are taking confidence from as they look ahead. India too announced three stimulus packages since March 2020, totalling a whopping Rs. 30tn, or 15% of GDP. Indian FM attempted to cover a broad cross-section of the economy through the packages – MSMEs, migrant workers, street vendors, farmers and allied sectors and several industries.
Epidemic, pandemic and a global scare -COVID’19
The biggest threat in 2020 came from the smallest of (probably) living organisms – the SARS-
CoV-2, commonly known as Coronavirus. What started as a localized infection (epidemic) in Wuhan province of China in the last few days of 2019 soon became a “once-in-a-century” global healthcare scare, a pandemic. Markets across the world reacted with extreme panic between February 2020 and April 2020 as millions of people lost lives, entire countries went into lockdown, factories shut (initially) and everyday life, as we know it, came to a standstill. At last count, there were a total 9.3cr cases globally and close to 20 Lakh deaths. In India, there were 1.05cr cases and
1.5 Lakh deaths. Vaccines are ready for commercial use and sale. However, there remain challenges by way of meeting vaccine demand, administering vaccine to the entire population (India and globally) and its efficacy and (probable future) side effects. A new strain of the virus emerged in the last couple of months of 2020, causing a scare in several countries. While it is yet unclear when we will get out of the crisis, markets seemed to have shrugged off most concerns regarding the pandemic.
Finally, the vaccine in sight!!
As the world got affected by COVID and its effects – health, social, economic, and psychological; pharma companies began searching for a vaccine on this deadly pandemic. The entire process of drug development ideally takes 2-3 years; however, given the advancement of research, the criticality of emergency and best brains globally working on a single mission led to 90-99% efficacy vaccine available in 10months. As per WHO (as on 12th January 2021), 63 vaccines are currently in clinical development, and 173 vaccines are in pre-clinical development. News surrounding these developments have routinely led to positive swings in the market.
Gold was one of the best-performing assets of 2020, returning 22% (in USD terms) versus 15% for Nifty. Investors sought refuge in this “safe-haven” asset as COVID-related issues roiled markets globally, especially in the first half of CY2020. Excess liquidity sloshing around globally led to USD depreciation and further supported the gold rally. Prices cooled off somewhat in the second half of the year as equities made a comeback.
2020: Key Sectoral and Macro Trend
Auto Volumes for December 2020 and CY2020
Some broader trends that emerged from December’20 and CY20 auto wholesale numbers were as follows:
Tractors followed by Two-wheelers and then PVs were the outperformers.
After several months of a slump, CVs picked up towards December; sustenance will be key. It was the most affected segment in 2020 due to drop-in economic activity and stalling of infrastructure projects due to lack of labour and prevention taking precedence.
3Ws were affected as people avoided public transport and instead preferred personal mobility.
PVs pushed volumes on sustained retail demand and low channel inventory; 2W OEMs took some inventory correction in Dec’20
Exports revival continued as more markets opened up globally.
Most OEMs announced price hikes ahead starting from the new year to offset raw material and other cost pressures.