The 2019 stock market rally explained

Investors were in for a reality check post a dream run of 2017, with most stocks falling sharply through 2018. But since February this year, markets took a turn upwards. And despite the recent sharp intra-day volatility, indices have made hefty gains.

What’s driving this rally? How have stocks moved?

• Primarily, FII investments and a general positive global sentiment has pushed markets up. Markets were heading into bear territory in 2018, as concerns over global growth, corporate earnings, and trade mounted. These risks have been factored in, and US interest rates are also heading downward.
• Back home, expectations of a stable government post elections rose. FIIs turned upbeat, net buying Rs 64,115 crore in 2019 so far against a net selling of Rs 32,783 crore in 2018.
• The market rally has been broad-based, spanning most stocks. The rally has also been very quick and gains sharp.
• Mid-caps and small-caps clocked much higher gains. Beaten-down stocks and sectors have participated the most in the rally.

Here’s more.

Broad-based rally

Since the start of the rally in February, here’s how key indices have performed:

In the latest rally, there has been a broad recovery. 90% of the Nifty 500 stocks have moved up. Of these, three out of every four stocks are up more than 10%. This indicates that the rally has been quite sharp.

Stocks have performed well across market capitalization too. Splitting the Nifty 500 into the large, mid, and small-cap buckets shows about 90% of stocks in each category ending higher over the last two months.

However, the extent of the rally has been greater in mid and small-cap companies. Large-caps gained 13.1% on average, having fallen 4.1% last year. Mid-caps are up 14%, after a 10% loss in 2018, while small-caps are up 18.4% since mid-Feb, after a 24.8% fall last year.

Beaten-down scrips recover

This better performance of the beaten-down stocks is a characteristic of the ongoing market movement. Of the stocks that have gained, more than half had suffered losses of over 20% in 2018. For example, Tata Motors tanked 60% in 2018, but has surged 41.5% since mid-Feb. The jump has come partially due to a low base, but also on the back of JLR’s improved outlook for the near future. Allahabad Bank, Corporation Bank, Bank of India, Bank of Maharashtra and Oriental Bank of Commerce have exited the PCA framework. These stocks had fallen in the range of 21%-39% last year, and have gained between 15% and 35% this rally. Below are some of the biggest gainers from this category:

Other beaten-down sectors have also made a comeback. Bank stocks, as mentioned above, recovered strongly as some came out of the PCA framework, the government undertook another round of recapitalization, NPA woes looked to be fading, earnings numbers began to pick up, and FIIs turned buyers. For instance, PSU banks are up 26% after a 34.7% crash last year. Private banks are up 22.3% since mid-Feb, having fallen 10.8% in 2018.

Oil stocks gained as pressure of high oil prices waned. Iron & Steel, infrastructure and consumer durables, capital goods and power were other prominent names. Most of these sectors had given negative returns in 2018. Improving industrial activity, healthier order books and order inflows, and capacity utilization inching higher all helped. All OMCs participated in this trend; IOC, BPCL and HPCL made gains ranging from 9% to 25%, after losing between 30 and 40% last year. Jindal Steel and Power shed 19.6% last year, and is currently up 34.8%. NCC is up 29% after a 34.1% dip in 2018, while BEL has gained 25% post a 51.7% fall last year.

Gainers still gain

2018, though a bad year for most stocks, did have a small share of performers. With 2019 paying attention to the beaten-down, have these stocks been left behind? Not really, barring traditional defensives FMCG and IT.

94 stocks ended 2018 in the green and have continued to move up over the last two months. Here are some prominent names:

A pull-back by the beleaguered stocks is a positive development; for one, it reduces the extent to which index returns are skewed towards a few stocks. Two, it suggests better support to a longer rally. Three, it is an indicator of an economic and earnings turnaround. And lastly, as equity funds looked to value-based and contrarian calls over 2017 and 2018, it has begun to pay off.