| 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. |
Market Update – July 2022
| 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. |
Market Update – June 2022
| May 2022 turned out to be one of the most challenging month in recent times for equity investors globally. Volatility was at its peak with risk-off clearly visible. Worries over a global economic slowdown amid aggressive policy tightening, lockdowns in China and ongoing Russia Ukraine conflict; dented investor sentiment. Taking a cue from global trends, Indian equity markets also followed the same trajectory. A strong rally towards the last week of the month did help the NIFTY50 end May down only 3.0%. However this does not reflect the sharp correction in broader markets. S&P BSE Midcap and S&P BSE 250 SmallCap were down by 5.2% & 8.1% respectively, with multiple stocks correcting a sharp 15-30%. Export ban on wheat, followed by a sharp export duty on steel dented sentiments, as investors started to speculate more such measures across other sectors too. RBI’s out of turn 50 bps rate hike also dented sentiments. During the month, FII selling continued with they pulling out another ~USD 5.2 bn while domestic institutions remained net buyers with a flow ~USD 6.6 bn. The performance on the corporate earnings front continues to be good. Despite headwinds for some companies/sectors because of sharp increases in raw material costs, energy costs and logistics costs; profit growth for the March 2022 quarter has been buoyant. Led by excellent performance from Private Banks, Consumer, NBFCs, Metals, Automobiles, and Capital Goods, Nifty companies PAT grew by 21% for the March 22 quarter. Oil & Gas, Healthcare, PSU Banks, and Consumer Durables reported earnings below estimates, while Technology and Cement’s profits were in line with market estimates. Overall Nifty earnings growth for FY22 came in at a strong 35%. We believe that we are entering a phase of consolidation in the markets and expect very minimal correction from these levels. Though the markets might remain range bound in the very near-term, opportunities are opening up in selective stocks. We would be constructive and be investors while focussing on our fundamental philosophy of buying companies with profit growth and where fundamentals merit the valuations they are trading at. |