Understanding the recent market rally

The three sectors with the biggest gains are PSU banks (up 14.3%), pharma (11.4%) and metals (up 10.4%)

The pattern of financial returns in the last month have been affected by unusual circumstances. The rupee has fallen against the dollar. Gold and silver have both lost ground. However, the Nifty is up and there's been positive returns across every sector. 

Logically, we would expect export-oriented stocks to have done well, given that the rupee has weakened and is expected to fall further. However, this is also when Q1 corporate results have come in, and those have definitely influenced trading.

The Nifty has returned 4.4 per cent in the past 30 days, while the Midcaps 50 has returned 7.94 per cent. All the sector-specific indices have yielded positive performances, which indicates some breadth to the rally. Out of the NSE's 12 sector indices, seven have beaten the Nifty (scoring more than 4.4 per cent) and three sectors have beaten the Midcaps.

The three sectors with the biggest gains are PSU banks (up 14.3 per cent), pharma (11.4 per cent) and metals (up 10.4 per cent). The PSU banks have been propped up by hopeful investors who see the accelerated recognition of NPAs as a positive. Only Allahabad Bank has a negative return in this period, and as many as seven (out of 12 stocks in the PSU Bank Index) have double-digit returns. 

The Bank of Baroda (+19.7 per cent) is the best performer, followed by State Bank of India (15.3 per cent), Canara Bank (14.6 per cent). A point to be noted: We've seen previous short rallies in the PSU Bank Index followed by sell offs when it's become evident that the NPA problem has not been dealt with. It's also an open question just how recapitalisation will happen.

Pharma has been driven by a combination of decent results, and hopes that the export-oriented sector will benefit from a weaker rupee. Since the sector had been relatively beaten down for quite a while, it was also seen as something of a turnaround opportunity. Out of ten stocks in the index, all have positive returns and seven have double-digit returns. Dr Reddy's, Divi's Lab and Sun Pharma are the three best performers with returns of 18.7 per cent, 15.5 per cent and 13.1 per cent respectively. There's a lot of money flowing into this sector, including into smaller pharma stocks. 

The stocks in the metals index have a much more volatile performance. The index actually offers very broad coverage of non-precious metals. The 15-stock index contains everything from Coal India, which is of course, a key supplier to the metals industry, NMDC and MOIL which are basic miners to several metals producers, to downstream products companies like Welspun Corp. The highest returns have come in Welspun (up 36 per cent), followed by NALCO (23.5 per cent) and Hindalco (15 per cent). The ferrous metals producers like Tata Steel (13 per cent) have also done well. The turnaround here has been based on several factors. First, global non-precious metals prices have risen steadily. Second, tariff protection for steel manufacturers. Third, increased demand from the construction industry and from automobiles. 

This brings us to the underperformers. The worst performance has come from the Nifty Auto Index (up 1.9 per cent), the media (up 2.2 per cent) and most surprisingly, Infotech (up 3 per cent). The auto performance can be explained by a look at margins, which have fallen as raw material costs and financing costs have risen. Infotech has been hit by uncertainties related to Brexit and US protectionism even though it should gain from a weak rupee. As for media, the majors reported flat or falling net income and falling ARPU (average revenue per user) in the case of cable operators.