Looking back at 2021 from Windmill Capital’s lenses
Before looking back at the year that was, here’s wishing everyone a very Happy New Year from all of us at Windmill Capital! :)
The year 2021 has been a mixed basket for India. The first quarter started quite well, with the launch of the covid vaccination program in January. However, by mid-April, a second wave of infections started spreading leading to huge spikes in new active cases as well as death rates. By June 2021, the vaccination program had taken off in earnest and the deadly effects of the second wave also started tapering off.
On the economic side, things have started looking up. During the first 3 quarters of the calendar year 2021, the average GDP growth rate was 10.03% compared to -9.43% average GDP growth rate during the same period in 2020. This indicated that the Gross Domestic Product has reached pre-pandemic levels. Composite PMI, which indicates the prevailing direction of economic trends in the country, has stayed above 50 in 8 of the 11 months till Nov’21. A figure above 50 denotes expansion in business activity.
That being said, the global commodity bottleneck and continued supply-side issues in India led to high inflation during the year. The supply-side issues were primarily on account of the spread of infections leading to localised lockdowns. This was further exacerbated by global supply chain headwinds, as there were acute shortages of certain items, for instance, semiconductor chips. This is an essential component when it comes to the making of automotives. Therefore, the mismatch between demand and supply, pushed freight charges up exorbitantly, hurting the small players in the market who did not have the sufficient economic cushion.
The Reserve Bank of India continued to maintain an accommodative monetary policy and has held the repo rate at 4%. An accommodative monetary policy is one where the central bank tries to increase the money supply in the economy by reducing interest rates (which is basically the cost of borrowing money) as that will incentivise people and businesses to borrow and spend/invest money — thereby reviving economic growth. In May 2020, the central bank had lowered the benchmark lending rate by 40 bps to the current level of 4%.
Stock market performance
Egged on by record-low interest rates and improving prospects for the economy, equity markets continued a good show during the year. The Nifty50 benchmark returned an impressive 25.5% return across 2021. The index hit an all-time high of 18,477 on October 18th. With regards to the broader market, the performance was even better with Nifty Midcap 100 returning 47.5% and Nifty Smallcap 100 returning 60%. While foreign portfolio investors invested ₹25,752 crore into equity markets through the year, mutual funds pumped in ₹82,336 crore during the same period.
From a sectoral point of view, Nifty Metal and Nifty IT were the best performing indices with a gain of 73.4% and 62.3% respectively. While the IT pack’s performance comes as no surprise, the metals pack was a surprise given it was sulking for the latter half of the calendar year. On the other hand, the dry run for the financial services space continued to reflect as Nifty Private Bank was the worst-performing index with a 4.8% gain followed by Nifty Pharma at 10.8%.
Government support and reforms
During her budget speech, FM Nirmala Seetharaman announced that 2 public sector banks and a general insurance company would be privatised. The government also announced the setting up of the National Asset Reconstruction Company Ltd (NARCL) to deal with distressed Public Sector Bank assets. In March, the Insurance Amendment Bill 2021 that allowed an increase of FDI limit in the insurance sector to 74% from 49%, was passed. In September 2021, the Union Cabinet allowed 100% foreign direct investment (FDI) via the automatic route, from the previous 49% in the telecom sector in India, to boost the sector. The government has also extended its Rs.111 lakh crore National Infrastructure Pipeline (NIP) to cover more projects by 2025 to augment economic growth. The pipeline which was launched with 6,835 projects has now been expanded to 7,400 projects. The NIP aims to invest in projects spanning across sectors such as energy, social and commercial infrastructure, communication, water and sanitation.
Let us take a look at the broad themes that worked and also the ones that did not -
On the Model smallcases side, the momentum theme has played out pretty well. All 3 top-performing smallcases have momentum as one of the primary criteria. Market cycle has played a crucial impetus to these momentum-based smallcases. Besides the overall theme, stock-picking helped substantially. We picked companies with quality management and strong financials. With respect to laggards out here, two smart beta smallcases were on the softer side of returns as factors like low volatility, specific financial ratio filtering tend to underperform during a bull run.
On the Thematic end, Transporting India has been a rank over-performer, given it had stocks that benefited from the entire unlocking theme, such as the likes of air freight & logistics, trucking and railroad sector. EVs were certainly the talk of the town, as companies related to building up the infrastructure of EVs in India gained substantially. It does not come as a surprise that Banking Privately was a laggard as the financial space kept battling through problems of its own.
On the Tracker side, the Tata group stocks were buzzing throughout the year with a lot of group companies rewarding its shareholders handsomely. The IT space in India experienced heavy tailwinds from the remote working environment, having a strong deal win pipeline and improved economics. As far as the bottom performers are concerned, the two pockets that experienced saturation were Insurance and FMCG. The market certainly believes that all major positives with regards to the insurance sector have been already priced in. For the FMCG space, one of the major reasons why it had done well in the latter half of 2020 was because of the hinterland demand. However, this time around rural demand has cooled off coupled with a lack of sector innovation.
Besides the above mentioned smallcases type, the asset allocation smallcases have been a good pick for investors over the previous year. One aspect that needs to be inspected in case of asset allocation smallcase is their performance during different phases of the market.
Let’s consider All Weather Investing smallcase as a proxy for asset allocation smallcases and deep dive into its scenario analysis during different time periods.
The All Weather Investing smallcase provides exposure to equity, debt and gold smallcases using Nippon Nifty 50 ETF, Nippon India Junior Bees ETF, Gold Bees and Liquid Bees. Every quarter the smallcase uses algorithms to decide the weightage of different asset classes. The strategy aims to provide stable and high long-term returns. The below table illustrates the performance of All Weather Investing smallcase, broader equity markets and gold.
Though during the course of the year, we saw occasional bouts of extreme volatility, staying invested in the markets would have been the best possible strategy. At Windmill Capital, our focus is on exploring new ideas that investors can benefit from. We shall continue to educate the larger audience about the markets and the economy and urge you to stay invested in equities for a long period of time. Stay safe and wish you a happy new year!
As an encouragement nudge for folks to begin their investing journey, we at Windmill Capital are running an offer on our Annual Subscription with a 15% discount across the month of January.
Use code “NY15” to avail the same.
Happy New Year, and as always, Happy Investing! :)