Market Outlook – May 2024

Date: 16 May, 2024

Domestic Updates

The Nifty index gained 1.2% in April 2024 (MoM) compared to the previous month, reaching a new high of 22,783 before settling at 22,605. This marks the third consecutive month of closing gains despite experiencing significant volatility with swings of over 1,000 points. Year-to-date (CY24YTD), the Nifty has climbed 4%. However, mid-cap and small-cap stocks significantly outperformed large-caps in April. Midcaps and small-caps rose by 4.6% and 10.2% respectively, compared to the Nifty's 1.2% gain. This trend continues year-to-date, with mid-caps and small-caps gaining 10.1% and 12.3% respectively, versus the Nifty's 4%. Notably, the valuation premium for mid-caps over large-caps has widened significantly. Historically, the average premium for the NSE mid-cap 100 compared to the Nifty 50 has been 16% over the past decade. Currently, this premium sits at a much higher level of around 40%. Looking at specific sectors, metals, public sector banks, and consumer durables emerged as the strongest performers in April, rising 7.4%, 7.2%, and 5.6% respectively. Conversely, the IT and media sectors experienced declines, falling by 5.2% and 1.1% respectively.  

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Domestic investors continued their buying spree in April, marking the ninth straight month of net purchases in the Indian stock market. They invested a significant Rs. 44,186 crore in April, following a record inflow of Rs. 56,311 crore in March. In contrast, foreign investors turned sellers again in April, offloading equities worth Rs. 35,692 crore after a brief buying period in March (Rs. 3,314 crore). Meanwhile, Systematic Investment Plans (SIPs) have been on a steady rise since August 2022, reaching an all-time high of Rs. 19,000 crore. Notably, mutual fund assets under management (AUM) witnessed a positive trend, reaching Rs. 53.4 lakh crore in March 2024. This growth is likely to continue as the strong performance of the stock market in April fuels investor optimism.  

Indian bond yields tightened against US yields. In April 2024, the yield spread narrowed to a 6-month low of 2.5% (7.2% vs. 4.7%). This positive outlook, combined with India's upcoming inclusion in the JPM Bond Index (with an estimated inflow of USD 20-22 billion between June 2024 and March 2025), is expected to drive strong demand for Indian government securities (G-Secs) in FY25. Active fund managers have already begun to position themselves for this anticipated increase in demand.

Macro Update  

India's trade gap narrowed in FY24 despite a slowdown in exports. While export growth fell from 6.9% in FY23 to - 3.1% in FY24, import growth also dipped significantly, from 16.8% to -5.4%. Service exports experienced a moderation due to a high base effect (43% growth in FY23). This led to a reduced overall trade deficit of US$78.1 billion in FY24 compared to US$121.6 billion in FY23. As a result, the current account deficit is expected to be slightly positive in Q4FY24 and remain below 1% of GDP in the coming years. Inflation also showed signs of cooling, with CPI dropping to 4.9% in March'24 (YoY) from 5.1% in February'24. Core inflation remained steady at 3.3% in March'24.

Global crude oil prices in recent years, apart from being impact by regular demand and supply conditions, have also been impacted by shocks due to escalated geopolitical tensions. For instance, average crude oil prices jumped from US$ 70.94/bbl in CY21 to US$ 99/bbl in CY22, this was not only due to re-opening of global economies post Covid-19 lockdowns, but also due to the outbreak of Russia-Ukraine war in Feb’22. following the war, oil prices jumped in Mar’22 and averaged US$ 112.5/bbl, noting a US$ 18.4/bbl MoM increase. After this, oil prices remained above US$ 100/bbl till Aug’22. Further in Oct’23, a war broke out between Israel and Hamas. While this did not have an immediate impact on oil prices, gradual expansion of tensions engulfing other Middle Eastern nations, led to increase in oil prices from Jan’24. Tensions in the Red Sea region led to changes in shipping routes and escalation in shipping costs. Currently, average crude oil prices are hovering near US$ 90/bbl. 

March CPI inflation came in at 4.85% YoY, down from 5.09% in February and lower than expectations. This decrease was due to a moderate rise in food prices, offset by a mid-month cut in fuel prices. However, food prices still accounted for nearly 73% of overall inflation in March. The MPC remains cautious, emphasizing the need for food price stability and a sustained decline towards the 4% inflation target before considering rate cuts. 

India's central bank (RBI) held its key interest rate (repo rate) at 6.5% in its April policy meeting, with most members (5-1 vote) in favor of maintaining stability. The bank aims to control inflation while supporting economic growth. While the overall inflation forecast for the fiscal year (FY25) remains at 4.5%, RBI revised its quarterly projections slightly downward. The earliest potential rate cut is anticipated in August 2024. 

Though the Composite PMI softened, it held above the long-run average. The Manufacturing PMI decelerated to 58.8 from 59.1 the month prior, while Services PMI moderated to 60.8 from 61.2. The G-20 weighted PMI softened in Apr’24 after four months of acceleration. Ten countries reported weaker figures, with Europe remaining weak. Brazil, China and Australia improved. US Manufacturing PMI coming below expectations raised concerns about economic cracks as interest rates stayed high. Chinese PMI improved slightly due to greater production, but private demand continues to be weak. 

International Updates  

Sentiments were weak in global equity indices in April-24 due to tension between Iran - Israel and inflation higher than expectations in the US. US treasury yield rose by 50bp MoM in April-24 and S&P and Nasdaq were down by 4% each in the month. Market has started to factor that higher inflation to make Fed delay rate cuts until Q4CY24. Globally, other equities fell from their recent peak, led by Japan, Europe and Australia. In EMs, Russia and China trended higher due to continued recovery from downfall. Inflation made more progress in the Eurozone area and the ECB remains on track for a first rate cut in June.

IMF has recently revised its global growth forecasts in its Apr’24 edition of the World Economic Outlook (WEO). The Fund believes that overall inflation is moderating and growth is divergent but remains broadly stable, which has increased the probability of a soft landing rather than a hard landing. As per latest estimates, global growth will remain stable at 3.1% in CY24 (2.9% projected in Oct’23 edition of WEO), unchanged from CY23. The upward revision comes from stronger growth expected in the US (2.1% versus 1.5% earlier), China (4.6% versus 4.2%), India (6.5% versus 6.2%), Russia (2.6% versus 1.1%) and Mexico (2.7% versus 2.1%). In contrast Eurozone economy is projected to perform worse than expected (0.9% versus 1.2%), dragged by weaker growth in Germany (0.5% versus 0.9%) and France (1% versus 1.3%). 

Rockstud Capital Market Outlook  

Equity markets have exhibited tepid performance thus far, influenced by impending elections, a dearth of near-term fundamental catalysts, and lofty valuations. The market's likely to stay sluggish in the near term unless foreign investors jump in with a big investment.

On the macroeconomic front, both leading and lagging indicators point towards persistent weakness in consumption, particularly pronounced in rural areas. However, with inflation moderating and a normal monsoon anticipated, coupled with election-related spending, we anticipate a potential bottoming out of consumption trends in the second half of FY25, contributing to economic growth. 

The benchmark Nifty index currently trades at a 12-month forward P/E of 19.7x, which is near its long-term average. Given the prevailing corporate cautiousness regarding future business forecasts, a prudent approach in the near term would be to maintain adequate liquidity (dry powder) to capitalize on any potential steep corrections in the market. 

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