Market Outlook – June 2024

Date: 14 Jun, 2024

Domestic Updates

In May 2024, India's Nifty 50 stayed flat despite global market strength, likely due to election jitters (1,290 point swing). It did reach a new high of 23,111 during the month. Notably, mid companies outperformed, with mid-caps up 2% MoM but small-caps were down -2% MoM. S&P revised India's outlook to positive (rating remains BBB-), the first upgrade in a decade, hinting at a future ratings boost. YTD, the Nifty 50 is up 3.7%, but mid-caps (12%) and small-caps (10.3%) are leading the pack. Sector-wise, Capital Goods, Utilities, Metals, Real Estate, and Autos were top performers, while PSU Banks, Tech, Private Banks, Media, and Healthcare lagged.

_{Source - 1 IDBI Capital}

Indian markets see a shift in investor participation. Domestic investors extended their buying streak for 10 months, investing $6.7 billion in May vs. FIIs' outflows of $3 billion. This trend holds for 2024 YTD - DIIs invested $25 billion compared to FII outflows of $2.8 billion. SIPs continue strong, hitting a record Rs 20,371 crore in April, up 6.7% from the 3-month average. This marks 10 consecutive months with inflows exceeding Rs 15,000 crore.

Interest rates on government bonds around the world fluctuated in May 2024 as expectations for future central bank actions shifted. India's recently introduced benchmark bond experienced a significant decline in May, falling below 7%. This enthusiasm in the Indian government bond market was primarily driven by the Reserve Bank of India's large surplus, renewed foreign investment, and a positive outlook revision by S&P. By the end of May, the yield on Indian bonds stood at 7.0%, compared to 4.5% for US bonds. The difference in yields (yield spread) remained unchanged from the previous month at 2.5%.

Macro Update

The 2024 Lok Sabha elections in India yielded a fragmented mandate, contrasting starkly with the BJP's commanding victories in 2014 and 2019, catching the markets off guard and prompting a roughly 6% decline in the NIFTY. The NDA secured 292 seats in the recent elections, a notable drop from their 2019 tally of 353, with the BJP clinching 240 seats compared to their previous 303. This performance fell considerably short of both exit poll projections and their own showing in 2019. The BJP's weaker performance, particularly in its traditional strongholds of North and West India, contrasted with gains made in East and South India and some concurrent state elections. The incoming administration is anticipated to maintain its focus on investment-driven economic policies but may adjust its priorities to bolster consumption and employment. With elections looming in major global economies, such as the USA, attention is also directed towards potential stances of the US Federal Reserve and other central banks.

In April, India witnessed a notable increase in its trade deficit, reaching a four-month high primarily attributed to a surge in gold and oil imports, as indicated by official data released on Wednesday. Imports surged substantially, while exports experienced only marginal growth compared to the same period last year. April 2024 saw a trade deficit of $19.1B, up from $14.44B in April 2023. Export figures for April totalled $34.99B, showing a slight increase from last year's $34.62B but a decrease from March 2024's $41.68B. The slowdown in global growth has adversely affected Indian exports, exacerbated by tightening interest rates, particularly in advanced Western economies, resulting in sluggish business, investment, and trade activities. Additionally, geopolitical tensions such as conflicts in West Asia and Ukraine, alongside the Red Sea crisis, have further impacted global trade dynamics.

India's thirst for discounted Russian oil reached a 10-month high in May. This surge was fueled by two factors: limited refining capacity in Russia due to Ukrainian drone attacks, which freed up oil for export, and attractive pricing for Indian refiners. They purchased a record 1.96 million barrels per day (bpd) of Russian crude, making Russia the dominant supplier with a near 41% share of India's total oil imports (4.79 million bpd) in May. Notably, Iraq and Saudi Arabia, traditionally India's top suppliers, fell behind with a 20% and 11.4% share, respectively. The average price of Brent crude oil in May 2024 was $83 per barrel.

India's consumer inflation dipped to a new 11-month low of 4.83% in April, down from 4.85% in March. However, food prices remained a concern, hovering around 7.9%. Vegetables, pulses, and spices together accounted for over half (52%) of the overall inflation in April.On a positive note, fuel prices witnessed a further decline, reaching -4.24% from -3.24% in March. This helped bring down overall inflation. Core inflation, which excludes volatile food and energy prices, also eased marginally month-on-month to 3.23% from 3.25%, providing some relief to the Reserve Bank of India (RBI).

India's central bank, the RBI, held its policy rate steady for the eighth straight time, maintaining the repo rate at 6.5%. This decision to continue "withdrawal of accommodation" to control inflation wasn't unanimous, with a closer vote of 4-2 compared to 5-1 in April. However, the RBI is optimistic about the economy, revising its GDP growth forecast for FY25 upwards to 7.2% (from 7% previously) due to factors like government spending, strong domestic consumption, and healthy corporate profits. Assuming a normal monsoon that keeps food inflation in check, the RBI's stance is likely to remain unchanged until October. A good monsoon would not only boost agricultural output (Kharif crops) but also strengthen rural demand. Additionally, growth in the services sector, driven by urban spending, alongside continued government investments, is expected to fuel economic activity.

International Updates

May 2024 saw a strong performance for global equity indices, particularly in the US. The S&P 500 and Nasdaq both surged 5-7%, reaching all-time highs on anticipation of potential interest rate cuts and a positive outlook on Artificial Intelligence. This market optimism suggests expectations of further economic growth. However, central banks are taking a cautious approach. The US Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) all maintained their current rates in May. While the Fed prioritizes bringing inflation down, concerns about the weakening labor market are leading to speculation of a rate cut by September 2024. Similarly, the BoE is anticipating a cut in August as inflation nears its 2% target. In contrast to other major banks, the Bank of Japan (BoJ) is expected to raise rates in July due to signs of inflation picking up again.

The US economy appears to have grown even slower than initially thought in the first quarter of 2024. Revised estimates show a downward correction from 1.6% to 1.3%. Meanwhile, there are signs of improvement in the Eurozone. The Markit PMI index for manufacturing rose to 47.3 in May, the highest since March 2023. This marks the third consecutive month of slower contraction, fuelled by an increase in new orders and exports. Business confidence in the region has also improved. On the other hand, China's economic outlook has brightened. The IMF upgraded its 2024 GDP forecast for China to 5%, citing stronger-than-expected growth in Q1 (5.3% vs. estimated 4.6%) and recent government stimulus measures.

Rockstud Capital Market Outlook

Indian stock markets kicked off June with a muted performance, despite achieving a significant milestone in May. The market capitalization crossed a historic $5 trillion mark in May 2024. This achievement is even more impressive considering the speed at which it was reached. It took just six months to climb from $4 trillion, compared to 2.5 years for the previous milestone. The 2024 election results could significantly influence investor behaviour. We might see a shift in focus from market narratives towards fundamentals like company performance. Additionally, the continued participation of retail investors, a major driver of recent market growth, will be worth watching. The formation of a new NDA government is expected to ensure stability in policies related to infrastructure, capital expenditure, power, and defense. This policy continuity could potentially drive market performance ahead.

India's economy seems to be in a sweet spot right now. Strong economic fundamentals, healthy company profits, and controlled inflation are all contributing to this positive outlook. Recent corporate earnings, particularly in banking, finance, insurance (BFSI), and automobiles, have surpassed expectations. Healthcare and capital goods companies have also shown good growth. While profit margins may not continue to increase at the same pace, future earnings can benefit from a rise in sales. In the coming months, the stock market will be watching two key events: the revised national budget (released around July 2024 after the elections) and any changes to interest rates, both globally and domestically. The benchmark Nifty index currently trades at a 12-month forward P/E of 19.2x, which is near its long-term average.

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