Is the rally sustainable?
The markets in the month of Nov consolidated by about ~4.2% and though it performed as per our expectations, it broke through our first resistance level but stayed below our second resistance level. It became the best-performing market on the backdrop of positive domestic macroeconomic indicators, the US Central Bank’s indication of slower rate hikes in the future, and signals of easing of covid restrictions in China. The increasing interest rate by the fed has weakened the rupee. The FIIs last month bought more than 22.5K Crs but the DIIs have been net sellers and have sold more than 6.3K Crs. Nifty closed out at 18750 levels and Sensex closed out at 63100 levels.
Looking at the sectoral performance for the month of Nov, most sectors performed positively. There were a few sectors which performed negatively, i.e. Pharma and Auto. Oil prices have fallen sharply due to the decline in crude prices, the EU price cap on Russian oil, and current market uncertainty on account of several reasons, from weak demand in China and this fall in crude prices, is expected to benefit our Oil & Gas sector. Indian auto sector remained largely stagnant in the past five months, due to weak demand from rural and export markets along with below-par profitability. The sectors which can do well this month include Banking, consumer goods, and Realty/Infra.
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Important events & Updates
A few important events of the last month and upcoming ones are as below:
- The Real gross domestic product (GDP) increased by 6.3% YoY in Q2FY23 after an increase of 13.5% in Q1FY23.
- The Monetary Policy Committee (MPC) increased the repo rate by 35 bps to 6.25%, in line with market expectations.
- The MPC expects CPI inflation to average out to 6.6% YoY in Oct-Dec22, and 5.9% YoY in Jan-Mar23, moderating further to around 5% YoY in Apr-Jun23.
- Money supply (M3) expanded by 8.9% YoY as on November 18, 2022, while bank credit rose by 17.2%.
- The deposit Growth rate increased to 9.6% in Nov 2022 compared to 8.2% in the previous month.
- India’s manufacturing PMI came in at a strong 55.7 in November, up from 55.3 in October.
- India’s services PMI for November has come in above the key level of 50, rose from 55.1 in October to 56.4 in November, indicating a sharp increase in output.’
- The MPC has lowered the GDP growth estimate for FY23 by 20 bps to 6.8% and by 10 bps to 7.1% in Q1 FY24, which is attributed to the spillover from the global economic slowdown and tightening global financial conditions.
- GST collection stood at 1.45 Lakh Cr for Nov’22.
Outlook for the Indian Market
The Indian market performance has shown resilience in the last couple of months and has outperformed the major global market by healthy margins, primarily due to the country’s robust and superior economic outlook vis-à-vis other emerging markets. GST collections thus have remained above the 1 Lakh Cr mark for fifteen consecutive months. GST collection stood at 1.45 Lakh Cr for Nov 22, which stood above the pre-pandemic levels but was below all-time high collections on Apr 22. UPI Transactions have been showing a consistent upward trend since its launch, indicating a strong pace toward a digitalized India. The Toll Collections have also seen a significant rise in recent months, indicating increased mobility, as well as further opening up of the economy as industries and allied economic activities, gather pace post-lockdown relaxations. Economic activities have continued the pace in Nov’22, its momentum backed by the festive season demand as well as strengthening consumer confidence to pre-pandemic levels due to high-Frequency Indicators like PMI, sharp expansion in output, further job creation, and subsiding inflation. All of the above factors are having and will likely have a positive impact on the Indian economy. The outlook for this month on fundamental & technicals is explained.
Fundamental outlook: The month of December is expected to be volatile and remain sideways but it may see some consolidation as well since even though the current domestic macro-economic factors are relatively positive, the CPI inflation has remained at or above the upper tolerance band since January 2022 and core inflation is persisting around 6%. Robust and broad-based credit growth, as well as the government’s emphasis on capital spending and infrastructure, will boost investment activity in the coming months which is a positive.
Technical outlook. Most global markets ended the last month on positive territory on the back of some positive news such as slower rate hikes in the US and decreasing Food and Oil prices. The rupee is depreciating against the dollar and the RBI is unlikely to intervene to strengthen it as it is likely to use every opportunity to rebuild its reserve stockpile as inflows return to emerging markets. The overall liquidity remains in surplus, with average daily absorption under the liquidity adjustment facility at Rs. 1.4 Tn during Oct-Nov22 as compared with Rs. 2.2 Tn in Aug-Sept 22. On a YoY basis, money supply (M3) expanded by 8.9% as of November 2022. Looking at the technicals there is immediate resistance at 19100 and major resistance around 19600 levels for the month of Dec. There is immediate support at 18100 levels and major support at 17600 levels. The RSI for Nifty50 is around 56.2 which signifies that it is in an overbought zone.
Outlook for the Global Market
The global economy is a mixed bag. Even though the US macro-economic data for Oct indicates a surprisingly resilient economy, the Nov PMI data shows a contrast, a decline to 47.7, the vacancies and wages have started to decline but currently the unemployment rate remains low and the inflation is also easing which is a slight sign of optimism. The Fed is likely to continue raising its benchmark interest rate and as a result, the unemployment rate is likely to reach between 4.5 and 5.0%. Even with the Fed’s hawkish tone, the market is hopeful that the Fed might soon pause its tightening of monetary policy since Inflation has decelerated lately by more than expected. Looking at the Eurozone, the inflation seems to be peaking based on the recent data from major economies, the consumer prices in the Eurozone were up 10.0% from a year earlier, down from 10.6% in October which seems to be primarily due to subsiding energy prices but it’s too soon to say for sure hence ECB will continue to tighten its monetary policy in the near term. The global manufacturing PMI fell from 49.4 in October to 48.8 in November, indicating a sharper decline in activity. This was the lowest number in 29 months and the third consecutive month in which activity declined.
Outlook for Gold
In the month of Nov, the Gold market performed positively by around ~4% and the demand for gold as a hedge against rising inflation still remains strong especially now since fears of a recession are amplified. The outlook for gold remains slightly positive to neutral for the near term.
What should Investors do?
Nifty-50 is relatively trading at a premium valuation compared to other global equity indices due to solid fundamentals, strong macroeconomic indicators, and easing inflation. The pace of increase of interest rate, due to moderation of inflation is expected to reduce in the coming months. Forex Reserves figures picked up in Nov22, after a constant downward trend since Jun22 due to the easing pressure on the rupee driven by a reduction in crude oil prices and a less hawkish US Federal Reserve stance. We expect the Indian markets to be volatile and trade sideways or may consolidate based on global macro since the global worries persist given the Russia-Ukraine War, the Euro energy crisis, uncertainties in China, etc. After considering all the factors we would recommend the investors take advantage of the market movements to add quality stocks based on fundamentals if they are available at reasonable valuations.
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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Also read: Market Outlook November 2022