Date: 18 Jul, 2024
Domestic Updates
The Indian stock market experienced some volatility after the central government elections in June 2024. However, the Nifty-50 index still managed to reach a new high of 24,174 and closed the month 6.6% higher at 24,011. Mid-cap and small-cap stocks performed even better than large-cap stocks in June, rising 20.7% and 21% year-to-date respectively, compared to a 10.5% gain for the Nifty. This trend is continuing so far in 2024, with mid-cap and small-cap stocks continuing to outperform large-caps.
Retail investors took advantage of the price dip following the election and bought stocks. Millennials, in particular, are actively investing in the stock market. This is reflected in the significant increase in the number of new Demat accounts opened in fiscal year 2024, with over 32 million new accounts representing a 20% increase. Systematic Investment Plans (SIPs) are also popular, and the monthly SIP contribution reached Rs. 20,900 crore in May 2024, showing an increase of 2% from the previous month and 42% from the same time last year.
Source - 1 IDBI Capital
Foreign Institutional Investors (FIIs) bought USD 3.1 billion in June 2024, after selling for the previous two months. Domestic Institutional Investors (DIIs) invested USD 3.4 billion in June 2024, following an inflow of USD 6.7 billion in May 2024. So far this year (CY 2024), FIIs have invested USD 0.3 billion in Indian equities, compared to USD 21.4 billion in the entire year 2023. Interestingly, DII inflows in the last six months have surpassed the total inflow for the entire year 2023.
There was significant variation in movement in global yields in Jun’24 within advanced economies. While 10Y yield in Indonesia inched up, yields in US, UK, China and Germany eased. US 10Y yields ended Jun’24 lower by 15bps at 4.40%. India’s 10Y yield traded broadly stable in Jun’24 and Jul’24 as well. There were anticipation of higher pace of frontloading by FPI’s but much of the buying by FPIs in debt segment already happened before the inclusion. Since 28 Jun 2024, FPI inflows of US$ 869mn have come in so far. Further, looking at the FPI utilisation rate, the benchmark security has the highest concentration due to higher liquidity. One of the notable developments in this month’s yield curve is the downward shift of short end papers (below 6-year tenor). Thus, some indirect impact might be felt on the shorter part of the curve. Needless to say, some easing in domestic liquidity conditions would also lend support.
The upcoming July Budget is expected to follow the path set by previous budgets with minor adjustments. Revenue and spending plans will likely remain similar to the interim budget, excluding the windfall gain from the RBI.
The Budget might bring positive changes for sectors like affordable housing, manufacturing, and consumer goods, while IT and pharmaceuticals might see minimal impact. The government's plan to support an additional 3 crore families in building houses signifies this focus on rural and urban development. Prioritizing capital expenditure over revenue spending will be a positive signal for domestic and international markets and investors.
Macro Update
The India Meteorological Department (IMD) predicted an early arrival of monsoon rains, which happened in Kerala. However, the monsoon's progress slowed down in the North West and Central parts of India. This delay caused the country to receive 11% less rainfall than usual in June 2024. While El-Nino is expected to weaken during the peak monsoon months, weather officials are keeping a close eye on it. Additionally, water reservoir levels are lower than last year (22% full compared to 28%) and also below the ten-year average.
India's core industries grew at a solid rate of 6.3% in May 2024, compared to 5.2% the previous year. However, some sectors benefited more than others due to a stronger performance last year impacting growth this year (base effect).
Year-over-year inflation measured by the Consumer Price Index (CPI) came in at 4.75%, slightly below the forecast of 4.9%. While food prices remained high at 8.7%, looking month-to-month provides a clearer view of the trend. After adjusting for seasonal changes, food price increases actually slowed down by 0.3%. Inflation excluding food and fuel (core CPI) also eased to 3.1% year-over-year, with most categories showing a slowdown except for personal care. Headline WPI inflation edged up to 2.6% in May from 1.3% in April, but still below the predicted 2.7% increase. However, vegetable prices surged to 32.4% compared to 23.6% in April, continuing a seven-month stretch of double-digit growth. Notably, inflation excluding food and fuel (core inflation) ended a 14-month decline and rose to 0.4% in May, after falling 0.7% in April.
The Indian Rupee (INR) gained slightly (0.1%) in June 2024 despite hitting a record low against the US dollar (USD) during the month (83.65/USD). This appreciation was supported by steady oil prices and a return of foreign investment (FPI) towards the end of June, even though the US Dollar Index (DXY) strengthened. For the first half of 2024 (H1), the INR has seen a small depreciation (0.2%) even though the USD has gotten significantly stronger (over 4.5%). The future movement of the INR will likely depend on what happens with the USD. While signs suggest US inflation and economic growth are slowing down, the possibility of the US Federal Reserve easing interest rates might be complicated by the current US political situation. As of now, the market expects a rate cut in September 2024, but this could change depending on the outcome of the US elections in November 2024.
The central bank (RBI) decided to maintain interest rates for the eighth month in a row. This means borrowing costs stay the same (repo rate at 6.5%, etc.). This wasn't a unanimous decision, with a closer vote (4-2) compared to April's (5-1). The RBI is more optimistic about economic growth, raising its forecast from 7% to 7.2% (closer to your estimates). This optimism is based on government spending, consumer spending, and company profits. Inflation expectations remain unchanged at 4.5% for the fiscal year, but the RBI is waiting for more data on rainfall patterns before making any adjustments.
International Updates
Stock markets around the world have mostly been doing well recently. In June, most major indexes were between down 6% and up 9%. The S&P 500 and Nasdaq both gained ground, rising 3% and 6% respectively. The rally seems to be driven by a strong US economy, with expectations of the Federal Reserve cutting interest rates and a boom in artificial intelligence. However, growth is uneven across the globe. While the US job market is holding steady, there are signs of weakness in manufacturing and consumer confidence. China's consumer-focused businesses are doing well, but investment is slowing down, hurting larger state-owned companies. In Europe, manufacturing activity is shrinking even faster, with businesses in Germany feeling particularly pessimistic about the future.
Central banks took a breather on interest rates in June. The US Fed, led by dovish comments from Chair Powell, signaled a possible rate cut later in 2024. This raises the chances of a September decrease. The Bank of England (BoE) is also considering a rate cut by September/November, influenced by service sector inflation and wage trends. The European Central Bank (ECB) cut rates by 0.25% in June but is likely to hold steady in July. Meanwhile, the Bank of Japan (BoJ) faces uncertainty about raising rates due to slowing growth. However, they're expected to announce a reduction of around $100 billion in their bond-buying program in July.
Rockstud Capital Market Outlook
The coming weeks are critical. The Union Budget is highly anticipated, as measures to boost consumer spending are essential due to ongoing weakness in rural demand. Additionally, unpredictable monsoon rains and extreme heat have complicated the inflation picture. Unseasonal showers and frequent heat waves have driven up prices in wholesale markets (mandis), while product arrivals have also been disrupted. However, India's underlying economic situation is very positive. Strong macroeconomic indicators paint a picture of a "Goldilocks economy" – healthy GDP growth (8.2% in FY24, following 7% in FY23), moderate inflation (around 5%), manageable current account and fiscal deficits, a stable currency, and robust corporate earnings (Nifty ended FY24 with 25% growth, and 14-15% CAGR is expected in FY25/26). Furthermore, there's a strong focus on manufacturing, capital expenditure (capex), and infrastructure development, while valuations remain attractive.
Markets in the second half of calendar 2024 could be less cheerful than in the first half even as more and more experts feel worried about its over valuation. However, India's strong economic growth, fuelled by government spending, real estate recovery, and rising consumer spending, makes it a bright spot. While corporate earnings and valuations might face temporary uncertainty due to the upcoming election, a good monsoon and potential U.S. interest rate cuts could boost the Indian market. Upcoming policy announcements will be closely watched for their impact on growth, earnings, and valuations. The benchmark Nifty index currently trades at a 12-month forward P/E of 20.2x, which is near its long-term average.
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