Initial Commentary
Indian Equity & Debt market saw great volatility in the month of July 2022. We were watchful of the following events.
• FED commentary & extent of rate hikes.
• FPI stop selling in Indian Markets.
• Oil settling at lower levels.
• Overall inflation number going down below 7%.
• Commodities cooling off
• Russia & Ukraine war situation.
• Trend of Q1 corporate result numbers.
As you have observed barring war situation, we have seen good amount of moderation in other factors in July 2022.
This corroborated with our view expressed earlier, that equity will bounce back in the second half of this year with inflation number improving.
Inflation:
This was crucial factor which kept equity & debt market in sell off mode. Inflation for global players was mostly on account of higher commodity prices. It is more to do with disruption in supply-logistics due to Russian sanctions & China lockdown. Inflation for India correlated with higher Oil prices as we import a major chunk (more than 80% if Oil needs).
The domestic inflation is likely to come in control with the base effect & commodity prices cooling off. Rest of the world is seeing moderation in inflation numbers, but it will take time for it to come down from historically elevated levels.
Fiscal Deficit:
India is facing a twin deficit. Fiscal deficit has touched 21.2% of FY 23 target in the Q1 of 2022-23. Government is confident of achieving overall target for 2022-23 to be 6.4% of GDP. It is very critical for India, that Oil remains below $100. We have already used 40 billion dollars to defend currency. Current account deficit of 34 billion dollars should eventually come off in the subsequent months. We also believe overall rise in exports & China Plus One policy should pull up the pace due to recent situation including their banking problem & lockdowns. This will help to get more dollar investment by way of FDIs.
Currency:
It was expected that Rupee would touch 80 to a dollar with oil & war situation. RBI defended it very hard and with the help of recent FPI flows & commodities cooling off, it recovered to 79.30. If oil continues to remain above $100 for a longer period, we have a chance of Rupee touching 81-82 zone again in the future if FDI & FPI flows remain muted. Fortunately, gold imports have dropped for India which is a major import item.
Fixed Income:
Post FED commentary & 75 bps hike, global bond yields have come off from their highs. US 10-yr yield has come down to 2.65% and Indian 10-yr yield has come down to 7.32%. We do expect rates to be raised by 35 bps points in August policy & our best – case scenario id for repo rate to touch maximum 5.75% to 6% and not beyond that. Overall rate moderate thereafter which means it is a suitable time to lock in long term bonds in next 3 months. For long-term RBI too expects inflation to moderate, and they have gone on record to say that they will care for growth while taming inflation. Short term yields may rise further with the hike in repo rate. This will bring down current steepness of the yield curve.
Government borrowing program has been smooth till date and with better-than-expected Q1 results, we believe tax collection including GST to remain good, will help government to not overshoot on the targeted borrowing.
Q1 Results:
It was widely expected that inflation will have a profound impact on Q1 results, but early signs are showing better than expected numbers. Equity market also took notice of it and has moved up almost 8% in the month of July 2022. One can see a good overall growth going ahead and consumption is seen intact. Employment situation is also good and with a busy season lot of temporary job opportunities will open-up.
Equities:
All macro indicators like GST collection and PMI data shows Economic situation has improved. Indians are known to live with inflation and 7% inflation is not alien to us unlike how it is for western part if the world. India is more of a domestic economy which helps the situation. FPI also took cue from FED commentary, that it was closer to end of rate hike cycle and thus global market went up.
FPI invested 6300 crores rupees in the month of July which is the first month of net inflow after September 2021. Thus, they were net sellers for last 9 months. This indicates that market has now began its upward journey without a doubt. Downside for NIFTY is now at 16100 to 16500 and it should trade with positive outlook. It is now prudent to push your investments as early as possible but only with the long-term perspective. Most of the factors which were negative for the market are now slowly settling and market may run ahead of its actual event. We may see occasional profit booking, mostly more in line with global markets.
Against the selling of 34 billion dollars since October last year, buying figure of less than a billion dollars in July by FPI is no way confirmation that they are back with a bang. Global worries are still far from being over. It is more of a relief rally. The very reason for FPI to sell in India was rising central bank rates, rupee depreciation, expensive valuation, and geo-political risk. We still feel
not all these worries are over.
Our Analogy is as follows:
• HDFC Limited processed record number of loans in June quarter, reported robust numbers which indicates that the real estate sector is heading towards a good growth phase.
• Auto sector has also revised and reported highest number of vehicles sold. Chip issue is more or less dealt with.
• IT sector too has shown a good top line growth.
• All these three sectors are important employment generator in India and all of them are in the pink of their health.
• Banking too reported good growth in their profits and lower stress of NPAs is comforting.
• All the above sectors account for two-thirds of the NIFTY earnings. Does we are very confident of the growth in the coming quarters and with good monsoon NIFTY will march ahead soon.
• We will soon hit very important festive season which is key for auto, white goods, and real estate sectors. This is against many other countries where exports, commodities, and infra play a major role.
• There is a lot of money waiting on the side lines for the confirmation of uptrend and with 8.50 crore Demat account holders, the retail segment has huge fire power.
• Thus, market has entered a new phase, and one should stay invested firmly without bothering for short term worries.
• The only challenge remains is the geo-political worries which we feel are unpredictable.
• So as a long-term investor this is the best opportunity to remain fully invested inspite of bouts of profit booking in the short term.
