Market Update – July 2021

The markets continued their optimistic run with the Nifty 50 Index gaining 0.9% for the month of June. Widespread interest in broader markets was visible with the S&P BSE Midcap and S&P BSE 250 Smallcap indices gaining 3.6% and 6.3% respectively. Hawkish commentary by US Fed lead to a momentary sell-off mid-June but a clarification led to a quick recovery in global markets. Indian Finance Minister announced another set of Covid relief measures with a focus on improving health infrastructure in non-metros and on the stressed segments (Small borrowers, Travel operators etc). In sector trends, IT was the clear winner supported by Accenture’s positive update and INR depreciation of ~INR 2/USD in June.

The second Covid wave in India has been more emotionally distressing. The number of people and families impacted has been much higher, with a quite a few unlucky ones being hospitalized and some who unfortunately died of the virus. Also, unlike the first wave which was predominantly an urban India phenomenon, the second wave was more spread out, with even the smaller towns and villages impacted. Though the restrictions during Covid-2 were localized and less stringent, the spread of the lockdowns across the country would surely lead to some pressure on revenues in Q1FY22.

The upcoming earnings season should be quite interesting. Higher raw material and crude prices will get reflected in lower margins, with higher shipping costs also adding to the pressure for most companies and sectors. At the same time, producers of commodities will report strong margins. Low base for April/June 2020 quarter will still lead to a very handsome year-on-year growth in corporate earnings.

There is surely over optimism building in quite a few small-cap companies, with almost every second company hitting new highs on a daily basis. Twitter and WhatsApp research reports are leading to huge rises in stock prices, as new first time investors lap up easy money making, at least for now. Caution is advised to investors, even as our longer term outlook on the markets remains very optimistic.

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