Inflation takes the centre stage:
The markets in the month of May were very volatile with some consolidation as we forecasted in our last outlook. There was carnage in the global markets during the 2nd week of May due to inflation numbers being higher than expected and bears had completely gripped D-Street as well but in the latter half of the month, it rebounded a bit and continued the sideways move for the rest of the month. The FII were sellers in the month of May and offloaded a massive more than 54k Crs worth of equity, which is the highest since the start of the pandemic in March 2020 but DIIs (highest since March od 2020) along with retail investors were able to soak up most of it and provided strong support. The Indian market closed the month in negative territory, with a downtrend of ~3%. Nifty closed out at 16500 levels and Sensex closed out at 55500 levels.
Looking at the sectorial performance for the month of May, The results are a mixed bag as some performed positively and some didn’t. Only one sector gave stellar return, i.e Auto, owing to an increase in demand due to expected good monsoon as well as significant headways made in solving chip shortages and supply chain issues. The ongoing conflict between Ukraine and Russia is still having unintended consequences throughout the world and majorly due to the elevated price of oil and gas, it is putting pressure on the margins of companies as raw material prices have been increasing. Auto OEMs, FMCG players, steel majors, airlines, and paper companies have also already hiked their prices and even indicated further increases if this issue is not resolved soon. The sectors which can do well this month include Auto, consumer goods, and Realty/Infra.
Important events & Updates
A few important events of the last month and upcoming are as below:
- In the recent RBI’s MPC meet between the 6th and 8th of June, the RBI has decided to increase the repo rate by 50 bps to 4.9% after the unexpected increase of 40 bps in May to fight inflation as the latest May inflation number (7.79%) was way of the RBI’s comfort level of 4% – 6%.
- India’s GDP grew by 8.7% for FY21-22 but it has slowed a bid in Q4 to 4.1%.
- The RBI has revised its inflation estimates for FY23 to 6.7% from 5.3% and it has maintained the FY22-23 GDP growth to 7.2% since the conservative estimate was lower than the market consensus.
- India’s trade deficit widens to $23.33 billion, exports up 15.46% to $37.29 billion in May owing to a surge in petroleum and crude oil imports, which increased by 91.6% to $18.14 billion.
- The RBI governor stated that capacity utilization (CU) in the manufacturing sector increased further to 74.5% in Q4 of 2021-22 from 72.4% in Q3 of 2021-22, which is a sign of economic recovery.
- India Vaccination program – India’s biggest vaccination drive update to date, the number of Covid-19 vaccine doses has crossed 194Cr and about 64.8% of the population is fully vaccinated. This is becoming more important as there has been a resurgence of the virus in some parts of the world.
Outlook for the Indian Market
Macroeconomic factors will be driving the market, at least for this financial year, as companies that have reported great earnings have also dropped due to their valuation in the current market condition. The markets have remained erratic with a furious struggle raging between bulls and bears. Indian benchmark indices have corrected ~14% from all-time highs and consequently, the trailing P/E of NIFTY50 has fallen around 20x levels, reasonably lower than it’s 10-year average trailing P/E of about 22.45xis causing funds to flow out of the bond market and into the equity market which is having some part in the current rally of the market and this expected to be mirrored in the Indian market as it has already seen that in the past few weeks. Looking at the GDP data, the growth seems to be strong despite new challenges this year but the tightening of the monetary policy for inflation control might cause a further slowdown of growth since much of the current inflation is directly caused by factors outside monetary control, that being said there are many positive indicators of the reviving economic growth so the outlook remains positive unless there is a major economic disruption. The outlook for this month on fundamental & technicals are explained.
Fundamental outlook: The month of June is expected to remain volatile with macro factors such as inflation, WPI, etc. driving the markets. The earning season was a mixed bag but companies with good cash flows and solid balance sheets are expected to perform well. In this month many major indicators were positive such as the PMI which indicated a revival of demand and an expected rate hike but WPI and CPI numbers in the coming week will determine the direction of the markets. The cleansed balance sheets and improving asset quality of the banks is the reason for sectors to be largely optimistic. Many structural reforms such as Goods and Services Tax, Insolvency and Bankruptcy Code (IBC), etc might have been temporarily overshadowed by external events such as the pandemic and now the geopolitical conflict but once these clouds recede they will begin to manifest and enhance India’s growth.
Technical outlook: The broader Indian market was in line with the global sentiment in the month of May but it was the worst-performing among its peers. Even though FIIs have been on a massive selling spree, the increasing DII and retail participation have increased the market resilience but the coming weeks are expected to experience elevated volatility as investors will be keenly monitoring inflation fig both CPI and WPI. Looking at the technicals there is immediate resistance at 17200 and major resistance around 17800 levels for the month of April. There is immediate support at 16000 levels and major support at 15400 levels. The RSI for Nifty50 is around 59 which signifies that it is in a moderate zone.
Outlook for the Global Market
Compounding the damage from the COVID-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation. Growth in advanced economies is projected to sharply decelerate from 5.1% in 2021 to 2.6% in 2022—1.2% below projections in January. Growth is expected to further moderate to 2.2% in 2023, largely reflecting the further unwinding of the fiscal and monetary policy support provided during the pandemic. In the US, the stock market rebounded strongly in May and even though the inflation seems to be plateauing there are fears of the Fed tightening too much and causing a slow down so it is a delicate balancing act and investors will experience volatility in the market in the near term. Output in ECA (Europe and Central Asia) is forecast to shrink by around 3% in 2022, as the war in Ukraine and its repercussions reverberate through commodity and financial markets, trade and migration links, and business and consumer confidence. Growth in the East Asia and Pacific (EAP) region has decelerated rapidly with a sharp slowdown in China. In China, after a much stronger recovery from the initial phase of the pandemic than in the rest of the world, growth lost momentum amid recurrent COVID-19 outbreaks and resulting strict lockdowns. To mitigate the impact of the pandemic on growth, the government has relaxed some property and financial regulations and eased fiscal and monetary policies. Infrastructure investment had rebounded and the pace of contraction in real estate investment had moderated but dipped again but now China is slowly reopening so this will have a positive impact on the global economy in the coming months.
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Outlook for Gold
In the month of Feb, the Gold market performed negatively with around a 1% drop but the demand for gold as a hedge against rising inflation remains strong. The outlook for gold remains neutral in the near term.
What should Investors do?
The impact of structural reforms, like GST and IBC, will help boost India’s growth once the cloud of the pandemic and geopolitical conflict recedes but in the near term the markets remain volatile, indecisive, and reactive based on macro cues. India’s earning trajectory has not yet been completely de-railed and the fact that India is going to be the fastest-growing economy in 2022 speaks volumes about the Indian fundamental story. For the coming month, we expect the market to be volatile with sight positive bias. We would recommend the investors to not go for any aggressive investments and keep an eye out for the inflation figures and investing in companies with solid cash flows will be a prudent strategy.
This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit mymoneysage.in
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