Date: 18 Sep, 2024
Domestic Updates
India's equity market continued its strong performance in August 2024, with the Nifty 50 index reaching a new alltime high of 25,268. Despite experiencing significant volatility (1375 points) throughout the month, the index closed up 1.1% and has now posted three consecutive months of gains. Year-to-date, the Nifty is up 16.1%. Mid-cap and small-cap stocks have significantly outperformed large-cap stocks over both the past year and the last five years (midcap outperforming 150% whereas small cap outperformed 126% to large caps). The healthcare sector led the way in August, with notable gains. Internationally, India's MSCI index (+40%) has significantly outperformed emerging market indices (+12%), highlighting the country's strong economic growth and market attractiveness.
Source - 1 IDBI Capital
Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) continued their bullish stance on Indian equities in August 2024. FIIs poured in USD1.4 billion for the third consecutive month, while DIIs maintained their strong inflows at USD5.8 billion. Year-to-date (YTD), FIIs have invested USD5.1 billion in Indian equities, compared to USD21.4 billion in 2023. DIIs have also outperformed, with YTD inflows reaching USD37 billion, surpassing the USD22.3 billion recorded in 2023. Retail investors played a pivotal role in August's market rally. Excluding new fund offers (NFOs), monthly inflows reached an all-time high of Rs 27,200 crore, surpassing the Rs 23,400 crore recorded in July. Even with NFOs included, total equity inflows were marginally higher at Rs 38,239 crore compared to Rs 37,113 crore. A slight market correction in the first week of August likely triggered "buy on dips" behavior among retail investors, contributing to the strong inflows.
The 10-year Indian government bond yield has declined by 6 basis points in August and September 2024. Favorable domestic liquidity conditions, increased foreign portfolio investment in Indian debt, and a decrease in the US 10- year yield have contributed to this downward trend. In September, foreign investors have invested an additional $1.1 billion in Fully Accessible Rupee (FAR) securities, exceeding their general limit for debt inflows. This has led to a downward shift in the entire yield curve. In the future, short-term yields may experience a more significant decline. The 10-year Indian government bond yield is expected to remain within its current range. However, favorable domestic inflation data and larger-than-expected interest rate cuts by the Federal Reserve could put downward pressure on the yield.
India's corporate sector faced a challenging Q1 of FY2025, as profit growth significantly slowed from the previous quarter. While sales increased compared to the same period last year, they remained below single-digit growth. Seasonal factors and elections contributed to a weakened demand environment. Despite these headwinds, there were signs of improvement in rural markets, evidenced by rising sales of fastmoving consumer goods, two-wheelers, and tractors. A favorable monsoon could further bolster this recovery. Industries like textiles, chemicals, and paper products also demonstrated positive momentum. However, the performance of sectors such as crude oil, cement, and iron and steel weighed heavily on the overall corporate results.
Macro Update
India's GDP growth decelerated to 6.7% in the first quarter of the fiscal year, falling short of market expectations i.e. 6.8%. Despite robust private consumption at 7.4%, which reached a seven-quarter high, government spending and real investments slowed at 0.2% and 7.1% respectively. While the farm sector struggled, non-farm sectors, particularly construction and unorganized services, performed better than anticipated. Despite a decline in fiscal investment, household and corporate investments remained steady. Street is building in 6.8% growth for FY25 vs. RBI’s estimate of 7.2%, as they factor in the risk of further escalation of geopolitical tensions and likelihood of El Nino conditions extending beyond current monsoon season, which adds risk to economic growth.
The ongoing South-West monsoon has shown promising signs, with cumulative rainfall surpassing last year's levels and exceeding normal expectations. As of September 9th, the country has received 8% more rainfall than the Long Period Average (LPA), leading to a significant improvement in reservoir storage. This year's rainfall, at 817.9mm, is well above the 684.6mm recorded in 2023 and even surpasses the normal rainfall of 760.6mm. This favorable monsoon has positively impacted agricultural activities, with the sown area for most crops surpassing last year's levels. Reservoir levels have also seen a significant boost, reaching 81% of total capacity on September 5th, compared to 62% last year. This positive development is expected to have a beneficial impact on inflation, particularly for agricultural commodities.
The nation's trade deficit widened to $23.5 billion in July, surpassing the previous month's and last year's figures. This increase was primarily driven by a more significant rise in imports than exports. Non-oil, non-gold imports rose sequentially, indicating robust domestic demand. However, cumulatively, oil imports have been the primary contributor to the import surge due to higher prices and reduced discounts from Russia. Looking ahead, a potential improvement in the trade deficit is anticipated as the export cycle may experience a revival. Global demand conditions are expected to strengthen due to looser monetary policies. Overall, the current account deficit is projected to be between 1% and 1.5% of GDP for the fiscal year 2025.
Core sector growth accelerated to 6.1% in July 2024 from 5.1% in June, primarily fueled by a resurgence in refinery, steel, fertilizer, and cement production. Government spending, particularly capital expenditure, bolstered steel and cement sectors. The fertilizer industry benefited from consistent progress in Kharif sowing. Refinery output increased as global demand prospects, especially in the US and China, improved. While electricity generation moderated due to cooler weather conditions, crude oil, natural gas, and coal production also declined. For the April-July period, core sector growth registered a slight slowdown to 6.1% compared to 6.6% last year, primarily due to moderation in crude oil, fertilizer, steel, and cement output. Based on the recent core sector trends, the Industrial Production Index (IIP) is projected to grow around 6% in July 2024.
Consumer Price Index (CPI) inflation in July 2024 dropped to its lowest point in nearly five years, reaching 3.5% from 5.1% in June. This decline was primarily due to favorable year-over-year comparisons. While food inflation decreased overall, it showed signs of increasing sequentially. Notably, core inflation, which had been decreasing for several months, rose to 3.4% in July due to higher telecom tariffs. Wholesale Price Index (WPI) inflation also moderated to a three-month low of 2% in July from 3.4% in June. This was supported by softening prices in both food and fuel & power categories. Improved rainfall across India suggests a positive outlook for future food inflation. Recent price data indicates a slowing pace of price increases in August. Given the subdued global commodity prices, core inflation is expected to remain relatively low. The Reserve Bank of India is likely to maintain a cautious stance on interest rates. Any potential rate cuts will depend on the sustainability of inflation's decline. As a result, market expectations for a rate cut have been pushed back to December 2024.
The Reserve Bank of India (RBI) maintained status quo in its July 2024 monetary policy, keeping both the repo rate and policy stance unchanged. While the decision was unanimous, the RBI Governor expressed concern over the potential impact of elevated food inflation on headline inflation. Food inflation had been persistently high, running in double digits, and the central bank revised its inflation projections upward for the next two quarters. This suggests that a rate cut is unlikely before December 2024 or even later. Despite the hawkish tone on inflation, the RBI remained optimistic about the growth outlook, affirming its GDP growth projection for FY25 at 7.2%.
International Updates
The U.S. stock market continued its upward trajectory in August, with the S&P 500 gaining 2.3% and the Dow Jones Industrial Average climbing nearly 1.8%. The Nasdaq Composite posted a more modest 0.7% increase. This marked the fourth consecutive month of gains for the S&P 500, driven primarily by strong performances in consumer staples, real estate, and healthcare sectors. Globally, stock markets exhibited mixed performance. Most major indices experienced growth ranging from 7% to 3% in August. However, the global economic outlook for 2024 has become more nuanced. While growth projections for both advanced and emerging economies remain relatively stable, there are indications of unevenness. The United States is expected to see a slowdown in economic growth, particularly among lower-income households. However, overall consumer demand remains robust. China's growth is anticipated to moderate due to concerns about domestic consumption. In contrast, the Eurozone and the UK are projected to experience a modest increase in growth as interest rates decline. Japan's economy is expected to remain resilient, although rising interest rates could dampen demand.
Unemployment rates in the developed world, particularly in the United States, are showing signs of increasing as economic growth slows. While immigration has helped to fill blue-collar jobs, a decline in white-collar position creation suggests that unemployment may rise further. Although headline inflation is moderating in major economies, it remains elevated in some emerging markets due to currency weakness and high debt. In the United States, core inflation is approaching the Federal Reserve's target as rental prices and wage growth stabilize. Chinese factory gate prices are contributing to global disinflation, but geopolitical tensions could disrupt this trend. With high real yields and inflation nearing target, markets expect the Federal Reserve to significantly cut interest rates in the coming year.
Rockstud Capital Market Outlook
The Indian stock market has been on a roll, hitting new records due to positive economic indicators and foreign investment inflows. The information technology, financial, and healthcare sectors have been the driving forces, while the industrial sector has lagged behind. Both domestic and foreign institutional investors have been net buyers of Indian equities. Global stock markets have also been on an upward trajectory. The recent passage of the elections and budget has provided a boost to the Indian market, although there have been periods of volatility. After three years of strong earnings growth ~20%, a slowdown is expected this quarter, with annual growth projected to be below 15%. Furthermore, the supply of equity shares has increased due to stake sales by promoters, private equity firms, and a large pipeline of initial public offerings. These factors, along with the outcome of the US presidential elections and global geopolitical events, could influence the market's future direction.
Despite potential market fluctuations, we anticipate that any declines will offer attractive entry points for equity investors. Consumption is poised for robust growth, driven by factors such as a favorable monsoon, the upcoming festive season, and a continued trend toward premiumization. Sectors like automobiles, real estate, and high-end retail are particularly well-positioned to benefit from this consumer spending surge. Moreover, the government's focus on private capital expenditure is expected to fuel a broader-based recovery in the capex cycle. Factors such as deleveraged corporate balance sheets, healthy profitability, rising domestic demand, and increasing capacity utilization support this optimistic outlook. While markets are inherently cyclical, maintaining a long-term investment perspective is crucial. Investors should carefully consider their goals, investment horizon, and risk tolerance to make informed decisions. Given India's position as one of the world's fastest-growing economies, coupled with favourable macroeconomic indicators like easing inflation, a progressing monsoon, and robust economic growth, the overall outlook remains positive. 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.
Disclaimer
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