Market Outlook – October 2024

Date: 14 Oct, 2024

Domestic Updates

Indian equity markets exhibited robust performance in September 2024, culminating in a series of all-time highs. The benchmark Nifty index reached a historic peak of 26,277 during the month, before settling at 25,811, representing a monthly gain of 2.3%. Positive investor sentiment was underpinned by a combination of favorable domestic and global factors, including an aggressive interest rate cut by the US Federal Reserve, substantial stimulus measures from China, a decline in commodity prices, ample domestic liquidity, and a conducive monsoon season. As a result, the Nifty index has recorded a year-to-date return of 18.8% in 2024.

Over the past twelve months, mid-cap and small-cap stocks have significantly outperformed large-caps, delivering returns of 48% and 50%, respectively, compared to a 31% gain for large-caps. Sector-wise, Metals, Utilities, Real Estate, Consumer, and Financial sectors emerged as the top performers with gains ranging from 4% to 8%, while Telecom, PSU Banks, and Technology sectors underperformed, registering declines of 2% to 5%. 

 _{Source - 1 IDBI Capital}

Foreign Institutional Investors (FIIs) maintained a positive buying streak for the fourth consecutive month in September 2024, net purchasing USD5.9 billion - the largest influx since January 2024. Domestic Institutional Investors (DIIs) continued their sustained buying trend for the ninth consecutive month, with strong inflows of USD3.8 billion in September 2024. 

Year-to-date (YTD) 2024, FII inflows into Indian equities reached USD11 billion, compared to USD21.4 billion in 2023. DII inflows into equities during the same period remained robust at USD40.8 billion, surpassing the USD22.3 billion recorded in 2023. September 2024 witnessed a vibrant primary market, with 13 companies launching Initial Public Offerings (IPOs) to collectively raise Rs. 14,825 crores. Premier Energies and Bajaj Housing Finance led the pack in terms of listing gains, with respective returns of 120% and 114%. 

The yield on 10-year Government securities (G-Secs) declined by 11 basis points (bps) to 6.75% in September 2024 from 6.86% in August 2024. During the month, the yield fluctuated within a range of 6.72% to 6.88%. Factors contributing to the yield decrease included fiscal consolidation efforts, a favorable balance between growth and inflation, robust Foreign Portfolio Investment (FPI) inflows, and a decline in U.S. yields. Looking ahead, the 10-year yield is projected to remain within a range of 6.68% to 6.75% in October 2024, with an equal likelihood of moving in either direction. Regarding the policy rate, it is anticipated that the Reserve Bank of India (RBI) will maintain a waitand-see approach before making any adjustments in December 2024, given the moderation in headline inflation. 

On Q2FY25 earnings front, despite a three-year period of economic slowdown, emerging indicators suggest a nascent revival in rural consumption. The recent conclusion of the CY24 monsoon season, with rainfall surpassing the long-term average by 8%, bodes well for rural income, demand, and food inflation. Nonetheless, against this backdrop, street estimates anticipate a modest flatness in earnings, with margin tailwinds potentially diminishing due to a high base. Growth is projected to be primarily driven by the BFSI, Healthcare, Utilities, and Telecom sectors, while O&G, Metals, Cement, and Auto are expected to weigh on earnings. A strong momentum is anticipated to persist in the Real Estate and Retail sectors. 

Macro Update

India's monsoon season concluded positively, with total rainfall exceeding normal by 8% (934.8 mm vs. 868.6 mm). This marks a significant improvement from the 5.6% deficit experienced in 2023. While the overall rainfall was favorable, distribution was uneven, with only 53% of subdivisions receiving normal monsoons compared to 73% last year. The above-normal rainfall is expected to benefit sowing and agricultural production. However, rural India's high-frequency data remains inconsistent, and the terms of trade for rural households continue to decline, affecting their purchasing power. Additionally, real rural wages, both in agriculture and non-agriculture sectors, have been decreasing this financial year. 

India's Current Account Deficit (CAD) experienced a slight increase to $9.7 billion (1.1% of GDP) in the first quarter of fiscal year 2025, compared to $8.9 billion (1% of GDP) in the same period of the previous fiscal year. This widening was primarily driven by a rise in the merchandise trade deficit to $65.1 billion (7% of GDP) from $56.7 billion (6.6% of GDP). However, net service receipts also rose to $39.7 billion (4.3% of GDP) from $35.1 billion (4.1% of GDP), partially offsetting the impact of the merchandise trade deficit. In light of these developments, market analysts have revised their CAD forecasts for fiscal year 2025 and 2026 downward to 0.8% and 0.6% of GDP, respectively, from previous estimates of 1.2% and 1.3%. 

Industrial output expanded marginally to 4.8% in July 2024 from 4.7% in June 2024, primarily driven by a resurgence in manufacturing activity. Mining and electricity generation contracted during the month due to monsoon-related disruptions. Within manufacturing, key contributors included refined petroleum products, machinery, and transportation equipment. From a use-based perspective, capital and intermediate goods witnessed growth, while other sectors experienced a slowdown. As government expenditure accelerates, particularly infrastructure investments at the central level and revenue spending by states, a revival in construction activity and associated industries is anticipated. Additionally, the progress of Kharif sowing is expected to stimulate rural demand. 

Consumer Price Index (CPI) inflation rose slightly to 3.7% in August 2024 from a 59-month low of 3.5% in July 2024. This increase was primarily driven by a year-over-year rise in food inflation, particularly due to higher vegetable prices. However, the outlook for food inflation remains positive, supported by the adequate progress of the monsoon season. Additionally, subdued global commodity prices are expected to temper core inflation, which is anticipated to remain at comfortable levels. Meanwhile, Wholesale Price Index (WPI) inflation moderated to a fourmonth low of 1.3% in August 2024, compared to 2% in July 2024. This moderation was attributed to softening prices in both food and fuel & power categories. Market expectations for inflation in fiscal year 2025 continue to range between 4.5% and 5%. Given the current inflation scenario, the Reserve Bank of India (RBI) is likely to adopt a cautious stance and refrain from cutting interest rates until a sustained moderation in inflation is observed. A rate cut in December 2024 may be considered only if the data consistently demonstrates a durable decline in inflation. 

The Reserve Bank of India (RBI) maintained the status quo on its key policy rates and stance in its August 2024 monetary policy meeting. While the decision was unanimous, the RBI Governor's statement expressed concerns about the potential impact of persistent food inflation on headline inflation. The revised inflation projections for the next two quarters suggest that a rate cut is unlikely before December 2024 or even later. 

International Updates

September, traditionally a challenging month for the stock market, defied historical trends this year. Following an early-September downturn, indices rebounded as investors expressed optimism about a potential soft economic landing. The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq Composite all recorded monthly gains, marking the first positive September for the S&P 500 since 2019. Moreover, all three indices concluded the third quarter in positive territory. The Federal Reserve's decision to reduce interest rates by 50 basis points significantly contributed to the stock market's performance during the month. Year-to-date, the S&P 500 has achieved a 21% increase, marking the first time since 1997 that the index has surpassed the 20% threshold within the first nine months of the year. Meanwhile, fueled by substantial stimulus, Chinese markets experienced a remarkable surge of nearly 19% in September. 

The Federal Reserve and the European Central Bank both lowered their key interest rates in August and September 2024, as anticipated by market analysts. The Fed enacted a substantial 50-basis point rate reduction, reflecting a softening labor market and a stable inflation trend. The dot plot indicates potential for another 50-basis point cut this year and an additional 100-basis point reduction in 2025. The ECB reduced its policy rate by 25 basis points amid deteriorating economic conditions. The Bank of Japan maintained its accommodative stance, increasing uncertainty regarding the timing of its next rate hike. China unveiled a stimulus package, with the National Development and Reform Commission announcing plans to accelerate 100 billion yuan ($14.1 billion) in government spending from the 2025 budget, along with an additional 100 billion yuan for construction projects. 

Rockstud Capital Market Outlook

Indian equities have exhibited a remarkable upward trajectory in recent years, underpinned by a synergistic interplay of factors. Robust corporate earnings, characterized by a staggering 24% CAGR in Nifty earnings during the FY2020 to FY2024, have been a primary catalyst for this sustained ascent. Concurrently, a surge in domestic inflows into equities, totaling an impressive USD107 billion from 2021 to the year-to-date 2024, has provided a significant impetus to the market's momentum. The market has demonstrated remarkable resilience in navigating critical events, such as the General Elections and the Budget, with minimal volatility. Even amidst geopolitical tensions, including the escalating Israel-Iran conflict and the ongoing Russia-Ukraine and Israel-Palestine conflicts, the Indian market has exhibited a remarkable capacity to absorb and overcome challenges. Overall, the confluence of strong corporate fundamentals, robust domestic investor sentiment, and a resilient macroeconomic backdrop has positioned the Indian equity market for continued growth. While geopolitical risks remain a factor, the market's demonstrated resilience and the underlying strength of the Indian economy suggest that it is well-equipped to navigate future challenges and capitalize on emerging opportunities. 

Despite a recent moderation in corporate earnings following several years of strong growth, driven primarily by commodity pressures and waning tailwinds from the BFSI sector, India's economy continues to exhibit resilience. Near-term catalysts, such as the ongoing festive season, improved monsoon, and subsequent rural consumption surge, are expected to bolster economic activity. The global shift towards monetary easing, spearheaded by the US Federal Reserve, presents a favorable environment for risk assets. While market cycles are inevitable, maintaining a long-term investment horizon remains crucial. Investors should carefully assess their individual risk tolerance and investment goals to make informed decisions. Given India's robust economic fundamentals, including easing inflation, a good monsoon, and sustained growth, the overall outlook for the Indian market remains optimistic. Valuations do look stretched at current juncture where benchmark Nifty index currently trades at a 12-month forward P/E of 21.5x i.e. ~5% premium to its long-term average as compared to other markets. The markets are expected to be volatile considering China markets have rebounded sharply, followed by FII’s interest in diverting their funds to a better attractive market. It is expected that stock specific ideas may perform differently than the overall index. 

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