Market Outlook – August 2024

Date: 16 Aug, 2024

Domestic Updates

Domestic equities have exhibited robust performance since the announcement of the FY24-25 Union Budget. Despite increased short-term and long-term capital gains taxes, the Nifty 50 surged 4% MoM in July, approaching the 25,000 mark. Broad-based market strength is evident, with mid and small-cap indices registering gains of 6% and 4% respectively. Domestic institutional and retail investors have been the primary drivers of this rally, complemented by net foreign portfolio inflows of Rs. 5,408 crores. The IT and Pharma sectors have been particularly buoyant, contributing significantly to the overall market momentum. However, a recent correction has been observed, potentially attributed to concerns over US economic indicators and the yen carry trade.  

^{Source - 1 IDBI Capital}

Foreign investors continued to be net buyers in the Indian market, purchasing $3.3 billion worth of Indian assets in July 2024. While domestic institutional investors also saw strong inflows, they were slightly lower than previous months at $2.8 billion. This trend has reversed the negative foreign investment seen earlier in the year. Domestic investor interest remains robust, with mutual funds attracting ?37,082.4 crore in net equity inflows in July, although this is a decline from the previous month. Retail participation continues to surge, as evidenced by the quadrupling of demat accounts in the past four and a half years to reach 162 million. 

Global bond yields continued their downward trend as investors reacted positively to the Federal Reserve's decision to hold interest rates steady and its dovish outlook. The softer-than-expected PCE price index reinforced expectations of a potential rate cut as early as September. Consequently, both Indian and US bond yields declined significantly, with the yield spread widening. While the 10-year US Treasury yield fell due to the Fed's stance, India's 10-year yield reached its lowest point since April 2022. Looking ahead, Indian bond yields are anticipated to remain stable in a narrow range of 6.85%- 6.95% for August, with a balanced outlook. 

The Coalition government’s maiden full-year budget for FY25 adheres to the fiscal consolidation path outlined in the interim budget, prioritizing capital expenditure in key sectors such as infrastructure, housing, urban development, agriculture, skill development, and digital technology to maximize returns on public investment. By marginally reducing the fiscal deficit target to 4.9% of GDP for FY25 and 4.5% for FY26, the government demonstrates its commitment to macroeconomic stability while avoiding abrupt fiscal tightening post-pandemic. The budget's infrastructure focus, with significant allocations to Bihar and Andhra Pradesh, where key coalition partners are based, underscores the influence of coalition politics on public spending. 

 ^{Source - 2 Government of India}

While public expectation ran high for measures targeted at rural upliftment and consumer spending, the Government of India has chosen a different fiscal path. The budget prioritizes capital expenditure, aiming to accelerate infrastructure development. This strategic shift is evident in the projected 17.1% year-on-year growth in capital spending for the upcoming fiscal year, a substantial increase compared to the previous five-year average of 30%. This marks a significant policy decision, as it allocates a larger portion of public funds towards infrastructure development than at any point in the last three decades. However, this focus on capital expenditure comes at a cost. Total government spending as a percentage of GDP is set to contract to 14.8% of GDP in FY25BE from 15.0% in FY24P, indicating a potentially tighter fiscal stance overall. This decision to prioritize infrastructure investment over immediate social and economic relief measures is a notable characteristic of the budget. 

Macro Update

India's monsoon has shown a strong revival in recent weeks, with overall rainfall surpassing the long-term average by 4% as of August 2nd. The second half of July witnessed a significant increase in precipitation, contributing to a 160.7mm downpour compared to the previous fortnight's 123.7mm. While the southern and central regions continue to experience above-normal rainfall, the northwest and northeast are still grappling with a deficit.The improved rainfall has positively impacted agricultural activities, resulting in a 2.9% increase in overall sowing area compared to the previous year. Pulses, paddy, oilseeds, sugarcane, and coarse cereals have seen a notable surge in acreage.

India's merchandise trade deficit expanded in Q1FY25 at $62.3bn compared to $56.2bn in Q1FY24, primarily driven by a more pronounced increase in imports relative to exports. While export values grew during the quarter to $ 110bn from $ 103.9bn, the accelerated pace of import growth at $172.2bn in Q1FY25 from $160.1bn in Q1FY24 resulted in a wider trade gap. Nevertheless, we anticipate a contraction in the trade deficit in subsequent quarters as export performance is projected to strengthen. Combined with the expected recovery of foreign direct and portfolio investment flows, this positive outlook is supportive of the Indian rupee. Overall, current account deficit is forecasted to remain within a range of 1-1.5% of GDP for FY25. 

India's core sector growth slowed in June 2024, with output expanding by just 4% compared to 6.4% in May. Key contributors to this deceleration included declines in petroleum, refinery products, crude oil, natural gas, steel, and electricity production. While coal, fertilizers, and cement output showed marginal growth, the overall trend was tempered. Factors influencing this slowdown include reduced government spending, weak auto sales, and a cooler-than-usual monsoon. On the positive side, the start of the Kharif sowing season boosted fertilizer demand, and government efforts to increase coal production yielded results. Additionally, the construction sector appears to be recovering, as indicated by rising cement output. These developments suggest that overall industrial production (IIP) growth may have moderated to between 4% and 5% in June 2024. 

Inflationary pressures intensified in June. Consumer Price Index (CPI) clocked in at 5.1%, exceeding our projection of 4.9%. Food inflation was the primary culprit, surging to 9.4% due to soaring vegetable prices triggered by the heatwave. Lower-than-expected wheat production has also pushed up cereal costs. While non-food inflation remained subdued with fuel prices declining, Wholesale Price Index (WPI) inflation accelerated to a 16-month high of 3.4%, driven by both food and manufactured goods. This broad-based uptick in prices underscores the challenges policymakers face. 

The Reserve Bank of India's Monetary Policy Committee (MPC) held its key interest rate steady for the ninth consecutive time, maintaining the repo rate at 6.5%. The MPC last changed rates in February 2023, when the policy rate was raised to 6.50 per cent. The decision was made by a 4-2 majority vote. Despite holding rates, the RBI indicated a continued focus on tightening monetary policy. While the central bank kept its full-year economic growth forecast unchanged at 7.2%, it slightly lowered its projection for the first quarter. Inflation for the entire year is expected to remain at 4.5% according to the MPC's estimate. 

International Updates 

US equity indices exhibited mixed performance in July 2024. While the S&P 500 registered a modest gain of 0.9%, the NASDAQ Composite declined by 1.6%. The market's trajectory was influenced by a combination of factors. Domestic economic growth, particularly in business investment, outpaced expectations, bolstering market sentiment. Anticipations of interest rate reductions by the Federal Reserve also contributed to market optimism. Year-to-date, the S&P 500 and NASDAQ Composite have outperformed the Dow Jones Industrial Average by a significant margin. A notable shift occurred in July, with small-cap stocks, as represented by the Russell 2000, experiencing an 11% rally. This rotation was primarily attributed to expectations of a more favorable interest rate environment and easing inflationary pressures, conditions typically beneficial to cyclical sectors with higher debt levels.

In Jul’24, In line with market expectations, both US Fed and ECB kept their policy rates unchanged. However both are expected to announce rate cuts in the Sep’24 meeting. Analysts expect 3 rate cuts by Fed this year and 2 cuts by ECB. BoJ delivered a hawkish rate hike, as it increased its policy rate to 0.25%, up by 15bps versus est.: 10bps increase. It also announced to trim its bond buying program by 2026. This decision comes, as wage negotiations have led to highest gains in three decades, which in turn may add to inflationary pressures in Japan. The move, along with investors' concerns about tech and other macro themes, sent global stock markets tumbling on 5 th August. However, in surprising turn, Shinichi Uchida, a deputy governor at the Bank of Japan, said on 7th August that the central would not hike interest rates when the financial and capital markets are unstable. This tipped global markets over the edge amid existing concerns over the US economy, cooling enthusiasm for AI, and geopolitical concerns. 

Rockstud Capital Market Outlook  

After a meteoric rise in FY24, Nifty 50, Nifty Midcap 100 and Nifty Smallcap 100 had delivered returns of 9%, 18% and 23% respectively so far in FY25. It can be inferred that the majority of the underlying stocks of these benchmark indices have moved ahead of their fundamentals. Hence, they run the risk of multiples contraction in case of any earnings growth deceleration or flow of money slowing down. Domestic theme related sectors, we believe, will continue to offer an oasis of safety. Therefore, even a complete unwinding of India’s carry trade exposure is unlikely to significantly impact the Indian equity market over the long term. Any meaningful shortterm fall in the Indian equity market should be seen as an opportunity to increase exposure to equity. 

July rally was led by defensive sectors with IT, Pharma and FMCG gaining the most. IT has been the best performing sector buoyed by better than expected earnings performance. For Nifty- 50, Earnings growth expectations in FY25- 26E remains strong with expectation of 12% pa in FY25E and FY26E. The Indian market is expected to consolidate at current levels as earnings aligned with the elevated valuations. The benchmark Nifty index currently trades at a 12-month forward P/E of 21.1x i.e. ~4% premium to its long-term average.