The strength in markets continued in August with markets reporting a second consecutive month of positive returns. Volatility was high as global markets corrected sharply towards the end of the month, led by renewed fears of sharp interest rate hikes and resultant spike in US 10-year Gsec yields. Dollar Index also hit a new high, triggering another bout of risk-off globally. Amidst all this, Indian equities outperformed major global markets. NIFTY50 ended up 3.5% for the month, while S&P BSE Mid-cap and S&P BSE Small-cap 250 indices outperformed large-cap indices. Except IT sector, all the other sectorial indices closed in green with S&P BSE Power, Capital Goods and Consumer Durables indices gained sharply around 15%, 8% and 8% respectively.
Indian equities have shown remarkable resilience over the last couple of months. This is particularly noteworthy given the continued volatility in global markets. On the economy front, India has stood out with outlook for GDP growth continuing to be over 7% for FY23 in a world where economies are struggling to avert recession. The added opportunities for Indian manufacturing on the back of China+1 move as also increasing competitiveness of Indian companies because of high power costs elsewhere in the world, is adding to the optimism. Domestic demand outlook is very strong led by increasing spending in the ensuing festival and wedding season – the first normal one in three years post Covid related shutdowns. Both rural India – led by record agricultural produce and high agri product prices, and urban India – led by income level increases particularly in the IT services and financial sector; is seeing increased activity and that gives confidence of a strong economic outlook. From a global investor perspective, Indian equities are coming back in focus, given the resilient economy and currency.
Although Indian markets looked relatively better, this very sharp outperformance in the global context has surprised lot of market participants. While we continue to believe that Indian equities will do much better than most global markets, in the absolute near-term select euphoria is being witnessed in the markets. The recent moves have been more allocation related and also momentum based. News flows globally will continue to lead to high volatility and patience and careful discretion should be the strategy going forward.
The month of July witnessed a very welcome and sharp rally in equities globally. After the sharp fall in the months of May and June, this up move did come as a boost to the confidence of investors. A sharp correction in commodities triggered views that worst of inflation is behind us. The ensuing fall in interest rate yields aiding the sentiments and a decent earnings quarter added to the optimism. Indian equity markets too participated in this global move and rallied sharply with NIFTY50 being up 8.7%, with S&P BSE Midcap and S&P BSE SmallCap 250 keeping pace. There was also a visible change in FII behaviour towards Indian equities. After a record selling of ~USD 50 bn in the past 8-9 months, July saw a turnaround wherein FII’s bought ~USD 0.6 bn. While the absolute figure is modest, it was the change in liquidity pattern which acted as a key catalyst.
Domestic earnings season has been broadly decent so far with indications of healthy demand environment. Despite there being pockets of margin pressure, there has still been decent profit growth driven by price-action and operating leverage. Q1FY23 earnings season early trend for 91 companies out of NSE 200 shows sales growth at 41% YoY, albeit on a lower base. Margins though have come in at three-year lows, a function of sharp increase in input costs. Profit growth of 13% YoY has been strong, led by sharp increase in profits from the financial sector.
Despite the spill over of the global geo-political tensions and financial market volatility, Indian economy has stayed on the path of improvement and economic revival. The movement of various high frequency indicators reiterates the momentum in the domestic economy. Economic cycle now has more legs (manufacturing revival, capex, global exports) vs consumption led earlier cycle. Macroeconomic factors like fiscal deficit, forex reserves, liquidity etc are strong. India’s macros are well placed within the emerging markets landscape and cannot be missed on global investment landscape. Normal monsoons bode well for the rural economy and an ensuing normal festive season (last two years impacted due to covid restrictions) should aid robust consumer demand over the next few months.
June 2022 was another challenging month for investors globally as markets remained concerned over high inflation, rising interest rates and its impact on global demand. With fears of recession / stagflation in focus, key benchmark indices globally fell in a 6-13% range. Indian equity markets also followed the weak sentiments, with NIFTY50 down 4.9% and S&P BSE Midcap and S&P BSE Small cap down by 6.2% & 6.4% respectively. Broader market correction has been more widespread with stocks down 15-40% in this correction phase.
On a reported basis, NIFTY50 Q1FY23 sales growth is expected to show sales growth of 32% while PAT growth is expected to ~20%. Cost pressures is likely to be seen at multiple sector/company levels due to high input costs. Key focus would be on management commentary on overall demand environment in the backdrop of elevated inflation, price & interest rate hikes and slowing global growth. If the demand outlook remains strong, then we expect markets won’t be too worried on the margin slide as commodities have started to cool off. After a sharp rise, prices of commodities across the board have started to correct meaningfully. Metals, Agri commodities as well as crude have come down substantially from their recent peak. The Bloomberg Commodity Index is down around 20% from its recent high in less than a month and makes us confident that the worst probably on inflation is behind us..
The last 2-3 months have been quite challenging for equity investors globally. Indian equities have also seen a sharp drawdown across the board and slightly more in the mid and small cap space. Apart from the macroeconomic concerns of rising inflation, rising interest rates, fear of growth slowdown and pressure on corporate profit margins; the record selling from FPIs has also been a major cause of this deep correction. Having said that, the situation on the ground continues to be optimistic.
From Indian equities perspective, the near-term will continue to be volatile. However, we would recommend that investors make fresh investments over the next couple of months. While returns won’t be linear, we are confident that healthy mid teen benchmark earnings CAGR over FY22-25 will eventually get reflected in market returns.