High volatility due to global factors:
The markets in the month of Sep consolidated by about ~4% and performed as per our outlooks expectation based on our previous month’s outlook. The Indian market during the first half of the month was on a rally on the backdrop of positive economic indicators but in the later half of the month, it dipped due to the extremely hawkish stance and due to record depreciation in the rupee against the US dollar. The increasing interest rates by the fed and the weakened rupee have also led to an outflow of foreign funds from the market, The FII last month sold more than 18K Crs but the DIIs have been net buyers and have bought more than 14K Crs. The Indian market closed the month in negative territory, with a downtrend of ~-4%. Nifty closed out at 17100 levels and Sensex closed out at 57400 levels.
Looking at the sectorial performance for the month of Sep, most sectors performed were down. There were a couple of sectors which performed positively, i.e Pharma and FMCG. Pharma, FMCG and chemical sectors might face some headwinds in the near term due to pressure on their margins due to currently high raw material costs but the raw material prices have been decreasing due to softening global demand. The sectors which can do well this month include Banking, consumer goods and Realty/Infra.
Important events & Updates
A few important events of the last month and upcoming ones are as below:
- The RBI raised its policy repo rate to 5.9% on 30th Sep’22 as expected, bringing India’s real policy rate to -1.1%.
- India’s current account deficit (CAD) widened to 2.8% of GDP in Apr-Jun’22 (Q1FY23), The CAD is likely to widen further to 3.3% of GDP in Q2FY23.
- US 10-year yield has moved up by 60bps to 3.8% in Sept-22. This was after Fed raised rates by 75 basis points at its September meeting and signalled that it will keep hiking rates until the funds level hits a “terminal rate”.
- GST collections stood at Rs. 1.47 tn.
- India’s retail vehicle sales increased by 11.0% YoY in September 2022.
- India’s manufacturing sector activity in September (55.1) was boosted by strengthening demand conditions and softening inflation concerns.
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Outlook for the Indian Market
Over the past 30 years, India’s goods and services exports have expanded 31-fold, driving the Indian economy’s dynamism over the period – but also enabling India to import more while focusing on its comparative advantage. The capital ratios of the banks have significantly improved and most banks are sitting on healthy, which is a big positive. Merchandise exports in the year to Jun’22 were up over 24.9-fold on their levels in the year to Jun’1992 (US$18.25bn), while ‘invisible’ exports had expanded 42.4-fold from $ 9.32bn to $ 395bn. The Global markets have been suffering due to high inflation and energy prices due to the conflict in Ukraine and very recently due to a cut in oil output from OPEC+, this will have an impact on the Indian economy due to higher energy and raw material prices and the raising interest rate by the Fed has caused the rupee to depreciate more than Rs. 81 so the Indian companies will experience near-term margin headwinds, But the medium-term growth outlook remains strong. India’s external debt declined to $ 617bn in Jun22 (19.4% of GDP) from $ 620.7bn in Mar22, this is a prudent response to the rising US interest rates. The outlook for this month on fundamental & technicals is explained.
Fundamental outlook: The month of October is expected to be volatile, looking at the current macroeconomic factors such as high inflation, depreciating rupee and elevated energy prices driving the markets. High-frequency indicators like GST, and PMI (55.1) continue to be strong in Sept-22. The latest print of CPI inflation has increased to 7% in Aug-22 compared to 6.71% in Jul-22. However, commodities have seen weakness and this could have a positive bearing on the inflation trajectory in the coming months but the still elevated energy prices is still a concern since recently OPEC cut its production by 2 million barrels which pushed up the oil price.
Technical outlook: The global markets have shown mixed results last month and the FIIs that were net buyers in Aug have become net sellers mainly due to rising Bond yields in the US and the depreciating Rupee. DIIs were net buyers. Looking at the technicals there is immediate resistance at 17700 and major resistance around 18300 levels for the month of Oct. There is immediate support at 16500 levels and major support at 16000 levels. The RSI for Nifty50 is around 59 which signifies that it is at a moderate level.
Outlook for the Global Market
Recently, as expected, the US Federal Reserve significantly boosted interest rates again, increasing the Federal Funds rate by another 75 bps to curb inflation. The US market was one of the worst performing amongst the global markets in Sep, driven by a hawkish Fed tone and indication for further rate hikes and balance sheet reduction. Employment growth remains strong, and many measures of economic activity are growing, even if more slowly than last year but inflation will still remain a concern which isn’t going away any time soon. The inflation in the Eurozone is mostly due to increased energy prices due to the cut-off of Russia’s energy supply and this, coming winter might be painful if they are unable to source energy from other producers. Energy prices were up 40.8% from a year earlier and up 3% from the previous month and Food prices were up 11.8% from a year earlier and up 1% from the previous month. The ECB continues to tighten monetary policy. Its main policy tools are the short-term interest rate and the sale of bonds which will slow down the economy and reduce inflation but in such a volatile global macro environment it is still uncertain. The Chinese economy may have already emerged from its cyclical trough in Q2 of 2022, but the road to recovery has not been smooth. There are some positive indicators like consumer spending and decreasing covid restrictions.
Outlook for Gold
In the month of Aug, the Gold market performed positively by around ~2% and the demand for gold as a hedge against rising inflation still remains strong especially now since fears of recession are amplified. The outlook for gold remains slightly positive for the near term.
What should Investors do?
Nifty-50 is relatively trading at a premium valuation to other global equity indices due to solid fundamentals, strong Marco economic indicators and easing inflation but there are a few concerns such as rupee depreciation against the Dollar which has ballooned import costs. We expect the Indian markets to be in line with the global Marco sentiments this month since there aren’t any expected domestic indicators other than the Q2 results which start later this month After considering all the factors we would recommend the investors to add quality stocks if they are available at a relative discount based on their earnings and 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 September 2022