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Market Outlook – Aug 2022

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” – Peter Lynch (American investor, Mutual fund manager & Philanthropist)

July was a classic example of a pullback rally, with Nifty moving from 15,752 to 17,158, a jump of 9%. It was a broader market rally with Large, Mid & Small Cap indices recovering in equal proportion. Nifty PE is trading at 20.85, just above the fair valuation. All sectors barring Energy ended the month in green. Energy lagged as Govt. levied windfall gains tax.

Reasons for the above jump:

  • Oil prices cooled off; Brent crude was down 6.8% month on month in July’22.
  • Net institutional flow rose to US$1.9bn with FPI inflows ending positive for the first time since September 2021, and domestic mutual funds recording inflows for the 17th straight month.
  • Inflation may be closer to peaking-out globally, given the cool off in most of the commodity prices, including oil prices, hinting of a slower rate hike trajectory by US Fed. Inflation in India remains relatively low and is on a path of moderation due to normal monsoons.
  • Q1 results so far has been as per expectations with no major setback. Management commentary has been upbeat, guiding for improved business outlook going forward.
  • US Fed hiked rates on expected lines & indicated moderation in pace of further rate hikes.

India’s economic activity remains unaffected despite the ongoing Russia-Ukraine war which has severely impacted other major countries in terms of supply chain destruction. June-22 marked the 12th consecutive month where Manufacturing & Services PMI held steady above the 50mark indicating continued expansion. GST Collections have been resilient since economy re-opened and have been a major source of revenue for the Govt. which is working towards reducing Fiscal Deficit. Overall economic activity is back and higher than pre-pandemic levels. Monsoons have been normal till now and will pave way for good rural demand and a bumper festive season ahead.

Equity Market Outlook – Short Term: Neutral, Long Term: Positive

We are of the view that against a 23% earnings growth, the more likely growth could be 17-18%. So, there could be a 4-5% correction on the back of earnings miss and another 4-5% correction because the valuations are outside of the comfortable zone. So, on a fair value basis, the market (Nifty) could be 9-10% lower than what we are today. Geopolitical and global macro concerns are still there. That could lead to continued earnings downgrades.

So current upbeat mood can be short lived and there is a possibility of one more dip back to 15800 levels for Nifty once the earnings expectations play out. From a 100% equity allocation since past few months, one should start allocation to Debt funds from this month.

Happy Investing!!!

Market Outlook – July 2022

“You make most of your money in a bear market, you just don’t realize it at the time” – Shelby Davis (American Businessman, Investor, Philanthropist)

Markets have clearly entered a bear phase with Nifty correcting from 16,594 at the start of June and touching a low of 15,183, a 10% correction before recovering to 15,780 by the month-end. Major reason for the above fall is fear of recession, which according to many experts, is more or less confirmed. Central Banks across the world has started to hike rates following a steep spike in inflation which will lead to decline in growth across economy.

Nifty PE is trading at 19.54, nearing fair valuations. USDINR has touched record high of 79.42 nearing the 80mark figure due to heavy outflow of dollar – FII Selling, Crude & Gold Imports. Govt has also imposed a 5% duty on Gold to reduce Gold imports.

Q2 Corporate results will start kicking in from this month and cost pressure on margins will be clearly seen in the P&L statement. We expect not so good result season this quarter, but the individual performances will be rewarded by the markets. Expect Nifty to move sideways with select focused funds delivering better returns than index in the next 6 months.

Recession is always good for markets. Markets performs better when liquidity is high. Due to the same liquidity, markets performed extremely well last year, and due to lower interest rates, people were borrowing more. Even Govt distributed money to people in COVID period, which added extra liquidity in markets.

At present markets are falling because this liquidity is getting squeezed by rising interest rates. Once recession is finally confirmed, inflation will fall due to low demand and growth will come to a halt. This will again make Govts start declaring stimulus packages to revive growth and Central Banks will also start cutting rates again, bringing back the much-needed liquidity in the market.

Hence recession is always good for markets, it is the signal of start of a bull market as markets are always forward thinking. A bear market cycle typically lasts for 1.5 years.  1 year is almost over, with another 6 months of pain left. Hence this is an opportunity in disguise, where one should make most of this fall/ cycle and invest fully in equities for a medium to a long-term horizon.

Market Outlook – June 2022

“Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend” – Bob Farrell’s 10 rules for investors (Head of Research, Merrill Lynch)

We are at present in the 2nd stage of bear market – reflexive rebound. Nifty created a bottom of 15,450 in May and bounced back 1250 points to trade at 16,700 levels at present. Large cap Index is still down 11% from its peak, Mid Cap 17% & Small Cap 16%. These are just index figures, individual stocks have fallen in the range of 30% to 70%, which does not reflect in index figures.

What is the main reason behind this fall and how much time will it take to recover?

Continuous FII Selling: FIIs recorded the eighth consecutive month of outflows at USD4.9b. Big question is if India is the best performing economy in the world with an 8.7% GDP growth, then why are the FII’s selling. Answer is simple, if you have a portfolio of 10 stocks in which 5 are in profit and 5 in loss and suddenly you are in need of money, which stocks will you sell, obviously the profit ones. That is what is happening to India. Since we are best ones where FII’s can book profits, they are doing the same. 

Reason for FIIs withdrawal: US Federal Bank has started increasing rates from this year. Rates have been hiked from 0% to 1% at present and targeted 3% by year end. Mortgage rates have shot up to 5.27% from 2.96% a year ago. This has increased cost of borrowing tremendously, making it unviable to carry on debt. Most of these low-cost money had made their way in developing markets like India, which is getting withdrawn due to high cost of borrowing there.

When will they come back:  Nifty PE is trading at 20.52 as compared to peak of 28.02. Though valuations have corrected, but still high and can correct more…say another 10% from here.

  • Retail inflation surged to a near 8-year high of 7.79 per cent in April, persisting above the RBI’s inflation target for the fourth straight month.
  • RBI suddenly raised the repo rate by 0.4% and expected to increase by another 1% by the year end.
  • 60% companies had their earnings missed due to low demand and higher input cost.

There are always 3 types of markets: Expensive, Fair Value & Cheap. You earn the highest if your investments are at cheap valuations. Analysing above pointers we conclude that market is still in between expensive & fair value zone and there is more room for correction. It is only because of continuous buying from Domestic Investors, markets can sustain at these levels.

Inflation is red hot across the world and expected to remain so till the remaining period of the year. Russia-Ukraine war, China Lockdown due to COVID are the main reasons behind high fuel prices, food shortage, chip shortage, etc. Till the time inflation does not comes down, central banks across the world are not going to halt their rate hikes. We expect this condition to remain throughout the year. Only a truce between Russia – Ukraine will be able to pull markets up, till then volatility with downward risk will continue.

Once rate hike is paused and inflation cools off, first country where FII’s will pump money will be India. Combination of FII’s + DII’s will take not even a week to touch new highs again. So, strategy is clear, do not expect very higher returns this year. Invest partially at every fall in a staggered manner.

Customers have generated an above average returns in the last 2 years as against single digit in an auto regular mode, by following the asset allocation rules/ strategy. Which follows a scientific method of calculation, with timely profit booking and reinvesting at lows.

Market Outlook – May 2022

Forex market. Young trader is pointing at graphs on computer screen and analyzing data while working in his modern office. Stock exchange. Trade concept. Investment concept

Testing Time Ahead – Nifty gave up most of the gains, which it recovered in April-22, correcting from 18100 to 17000, down by 6%, on account of disappointing Q-4 numbers, geo-political tensions, rate hike by Fed, lockdown in China and rising inflation (as the main reasons for this fall).

Stagflation is now a real risk around the world, where the economic growth rate has become slow, unemployment is high, accompanied by high inflation. Central Bankers (apart from the US) are in dual mind whether to increase rates, or hold-up. We expect markets to be range bound for next 3-4 months and advice clients to accumulate gradually on every fall. Do not expect higher returns immediately and one can see some green shoots visible during the Diwali period or later.

Key Events – May 2022:

  • Fed meet on 4th May, 50 bps rate hike expected, with a commentary on the pace of further rate hikes crucial – Negative for the markets.
  • Russia to celebrate its annual Victory Day over Nazis on 9th May and likely to announce its further strategy on Ukraine War.
  • LIC IPO to start from 4th May, with an issue size of 21000 Cr, biggest ever IPO till date.

During FY22, FIIs sold ₹1.40 lakh crore in equities compared to the last year when it was a net buyer of ₹2.74 lakh crore. Meanwhile, DIIs were net buyers of ₹1.26 lakh crore in first eleven months of FY22 compared to net sale of ₹39,000 crore last year. Apparently, this is one of the worst outflows from India by FIIs in many years.

All this is because of the unexpected pandemic, that hit the country badly followed by another event that escalated inflation in the country – i.e., the Russia-Ukraine war — and most importantly because of monetary tightening in the US, which makes the US debt market more attractive to FIIs. And hence the huge sell-off.

Even after a challenging time since COVID-19 that triggered the sell-off by FIIs, markets do not seem to be intimidated by the selling spree of foreign investors as domestic institutional investors (DIIs) have come to the rescue like never before. The constant surge in systematic investment plan (SIP) inflows is among reasons markets have been offsetting most of the selling pressure from foreign investors as every market correction is seen as an investment opportunity.

Market Outlook – April 2022

Recovery Time … War in Ukraine is still not over, but the markets have recovered significantly. Nifty touched a low of 15800 in March, down 15% from its peak of 18600, but recovered 14% by the end of the month to reclaim 18000. Since US & European Countries did not directly participate in the Russia-Ukraine war and only levelled sanctions, markets world over breathed relief, as this has not escalated into a full-scale world war. Crude Oil corrected below 110$ levels and metals also corrected.

BJP won UP assembly elections with a huge majority and this event was a big positive for the markets, as it was an indicator of what to expect in the 2024 Lok Sabha elections. COVID restrictions were completely removed in many states, also a key reason for the sharp rise in markets. Fuel Prices saw a jump of Rs 10/- per litre post elections and another Rs 10/- the jump is expected in the coming days, threatening a huge spike in inflation and a big negative for markets going ahead.

Key Events Apr 2022:

  • Duration of Russia-Ukraine War: if it does not end soon, crude may remain above $100 per barrel, and markets will remain lower till that period.
  • RBI Policy decision: on April 8th, Governor is feeling pressure to hike rates.
  • Fed expected to hike: another 50bps in the next policy meeting, negative for the markets.

Key to markets was consistent buying from retail investors, which absorbed much of the Fed rate hike shock. We expect the Ukraine-Russia war to get over by month end as both parties have shown good progress in talks.

Since the profitability of Indian companies will be impacted by rising fuel prices, markets may remain sideways for this quarter. But one can expect a good rally post-July-August festival season.

Market Outlook – March 2022

It’s a War Time… Russia attacked Ukraine and the entire world markets went for a toss. Dollar, Oil, Gold, all shoot-up, and the world markets crashed. Nifty is now trading around 16500, 2100 points lower from its all-time peak. Nifty has corrected 11%, Large Cap Index 11%, Mid Cap Index 15% & Small Cap Index 15%. Nifty PE is trading at around 21.35, from a high of 41 in March 2021, indicating a hefty correction valuation wise.

Key Events in March 2022:

  • Duration of Russia-Ukraine War; longer the period, longer it will take to recover.
  • High Crude Oil prices to fuel inflation; negative for markets, as RBI will be forced to hike rates.
  • Any Setback for ruling party (BJP) in UP elections; will further open downside for markets.
  • Fed Policy meet on 15th March; any rate hikes will be negative for markets.
  • LIC IPO is due this month; if postponed, will be a big relief for the market, as liquidity will not be squeezed by this IPO.

Historically, markets shoot-up on an average 25% whenever such war-type event ends. Only negative for India from this war is the high crude oil prices, whereas on the positive side this is a golden opportunity for India to take over China in manufacturing and other sectors as FIIs will be hesitant to park any money in China as it is threatening the world over Taiwan. India is the safest country in Asia or Emerging markets to park money at present.

The growing retail participation in Indian markets has also not allowed markets to fall heavily despite FIIs being consistent sellers.

Therefore, start accumulating on any dips, as markets will not remain lower for long and will pull back as soon as this crisis ends. We expect max another 1000 points correction in Nifty from here, i.e., 15500. There is a good buying opportunity below 16K levels. One can look at moving debt allocation to equity, the moment Nifty breaches 16K levels. Also, one can look at equity participation on fresh funds, on a minimum one-year investment horizon as well.
Speak to your Advisor for details & guidance.

Market Outlook – Feb 2022

No Bad News = Good News!!

The Union Budget 2022 was presented on 1st Feb’22 amid high expectations. Although the Economic Survey forecasted 9.2% real GDP growth in FY22, followed by 8-8.5% growth in FY23, the markets were anticipating that the government would announce measures to support weak consumption. Instead, the government continued on its course to improve the quality of its expenditure by focusing on investment growth.

Budget has been announced amid a positive backdrop of a sharp economic recovery from the pandemic lows as well as a buoyant capital market. The backdrop, however, has turned more challenging in the recent past with the US Fed and other Central Banks shifting their focuses towards containing inflation. Consequently, the prevailing easy liquidity along with the low interest regime is on the last lap now and equity markets have, naturally, turned topsy-turvy.

However, the budget presented by the Honourable Finance Minister (FM) has demonstrated continuity as it has built on the last year’s budget announcements. Growth revival remained the principal theme of the budget. With this objective in mind, the government has largely continued with its focus of:

a) driving capital expenditure (capex) by enhancing gross budgetary supports for roadways, railways and defence sectors, and 

b) propelling the manufacturing sector through PLI schemes, while transitioning the economy with an emphasis on urban planning, logistics, EV’s, solar module manufacturing, river linking, water connections, etc.

The FM has also focused on using PM Gati Shakti that was announced in Oct’21 to dismantle silos within the government for seamless building of infrastructure projects and improving the ease of doing business. Resisting the temptation of populist giveaways ahead of the five state elections in Feb-Mar’22, the government has largely remained on track with a focus on long term structural growth drivers. Fiscal deficit is expected to moderate to 6.4% in FY23 BE from 6.9% in FY22 RE. 

Overall from an equity market perspective, we believe the budget, on balance, has no unpleasant surprises, while there remains some room for further capex/spending push as the government is likely to overshoot its revenue targets. While there could be some disappointments on the absence of measures to improve consumption, economic recovery in FY23 coupled with vaccination progress would continue to drive demand recovery ahead. 

Crude prices around USD90/bbl will present a challenge for inflation ahead and act as a risk for fiscal maths. Given the continuity of policy focus and pronouncements, we believe markets will discount the budget and shift focus to: 

a) rising interest rate regime globally and consequent higher bond yields and 

b) corporate earnings growth that has remained resilient so far in the ongoing 3QFY22 earnings season. 

The forthcoming RBI policy meet on 9th Feb’22 assume greater significance now with respect to the future of liquidity and interest rates. Valuations are slightly rich with Nifty trading at 20x FY23E EPS and thus the corporate earnings delivery becomes highly crucial, more so in a rising rate regime. 

Mkt Outlook Feb 2022:

  1. Nifty is still trading 1000 pts lower from its all-time peak.
  2. Q3 results are till now matching expectations and crucial for market which are trading on high valuations.
  3. RBI Policy on 9th March. Central Bank will declare path on increasing rates due to persistent inflation and overall economic recovery. Negative for market.
  4. LIC IPO will hit the market by Feb-end with a staggering issue size of 75,000 Cr, the largest till date. Market may correct as it will suck huge liquidity from the system.
  5. Crucial state election results (mainly UP) on March 10th. If BJP does not win or wins with small majority, it will be negative for the market.

Hence be prepared for a volatile month. Nifty may test 16400 its support level in case of any above negative news. But good corporate results will keep downside capped and should be used as a buying opportunity.

Since investments in international funds have been stopped temporarily due to overall industry limit of $7 Billion set by SEBI has been reached. SEBI is soon going to raise this limit, till that time no new investments will be allowed in these schemes. Nothing to worry as this is normal checks & balances from SEBI. Hence allocation in international segment will be nil for this month.

Market Outlook – Jan 2022

Recap 2021:

  1. Nifty & Sensex jumped 24% & 22% respectively. 
  2. Large Cap generated 26% returns, Mid Cap 36% & Small Caps 57%.
  3. During CY2021, market rally was broad based unlike 2020.
  4. Most economies clocked in positive returns for the year due to reduction in COVID cases, stimulus measures & release of pent-up demand.
  5. Central Banks paused further rate cuts & speeding up tapering program.
  6. Emerging & Developed Countries are witnessing a high inflation.
  7. Corporate Balance Sheets appear to be healthy given rise in profits and decline in Debt over the last 2 years.
  8. 5x jump in the middle-income bracket (people crossing $2000 per capita income mark) in last 6 years.
  9. Supportive Govt. Policies – PLI Scheme, Insolvency & Bankruptcy Code, Consolidation of PSU Banks, Land Reforms, Make in India.
  10. Retail investors participation in direct equity jumped to a new high. Average 26 lakhs new Dmat accounts were added in 2021. 
  11. There was a surge in new companies tapping markets through IPOs. Total 63 companies collectively raised 1.18 Lakh Cr in 2021.

Outlook 2022:

  1. Omicron threat has subsided as it is milder in nature and hospitalisation cases will be lesser.
  2. Equity markets will perform well but will be volatile due to changing macros and high valuations.
  3. Central Banks will be increasing rates due to persistent inflation and overall economic recovery.
  4. Increased vaccinations and launch of new breakthrough drugs may see an end of Covid in 2022.
  5. Crucial state election results (mainly UP) will decide the future of Modi Govt.

Avoid Investing Mistakes 2022:

  1. Not giving due respect to valuations & investing blindly with flow of markets.
  2. Not following asset allocation model for investing.
  3. Investing based on last 2 years bullish returns.
  4. Investing in IPOs without understanding the business.
  5. Not opting for Debt as a capital preservation tool.

Important events that will affect markets in Jan 2022: 

  1. Quarter 3 results will be announced this month, expected to be in-line with expectations.
  2. Omicron spread and its impact in coming days will be keenly watched.
  3. 16500 Cr worth IPOs lined up in January 2022. Adani Wilmar, Ruchi Soya & Go Airlines among the big ones.
  4. Budget to be presented on 1st Feb, 2022.

Market Outlook – Dec 2021

Nifty & Sensex corrected 9% each, due to Omicron fears worldwide, but recovered 3% each as news of new virus being milder and not lethal emerged. Nifty PE is trading at 23.7 as compared to 28.17, as the profit booking helped high valuations cool-off.

RBI Policy was announced today, and the status quo was maintained. The MPC also maintained “accommodative” stance. CPI inflation is projected at 5.3% in 2021-22. This consists of 5.1% in Q3, and 5.7% in Q4 with risk broadly balanced. RBI Governor said central bank would continue to manage liquidity in a manner to maintain financial stability.

Important events that will affect markets in December: 

  • Fed Policy meet on 16th December. Decision on increasing tapering speed and earlier raising of Interest rates in 2022 will be discussed. 
  • Omicron spread and its impact in coming days will be keenly watched.
  • 25000 Crore worth IPOs lined up in December.
  • Bill to regulate crypto currency will be presented in parliament.

FIIs now have been net sellers in last 8 consecutive months, while DIIs are the net buyers, and retail participation has again been the saviour, helping the markets to rebound from lows.

IPO market will be hot again in December, with big names like Emcure Pharma, Delhivery, Aadhar Housing, Adani Wilmar, Go Airlines and 27 other companies lining up their new issues worth 25000 Crore.

Market Outlook – Nov 2021

Nifty & Sensex touched a new high of 18604 & 62245 respectively in Mid-October but had a sharp correction by the month-end. Nifty & Sensex fell 5% each. Large Caps corrected 5%, while Mid & Small Caps corrected 8% each. Valuation wise, these figures are in the overvalued zone and needs correction, which has started.

Reasons for correction:

  1. Fed Policy meet on 3rd November, for the start of tapering.
  2. Big IPOs like Paytm, Policy Bazaar squeezing 27000 Cr liquidity from the market.
  3. Markets rebalancing itself as per 2nd Quarter results.
  4. Oil breaching $100 mark again.

“If GREED & fear had to own one stock market globally for the next ten years, and not be able to sell it during that period, that market would be India,” – Christopher Wood, global head of equity strategy at Jefferies, wrote in his latest weekly note to investors GREED & fear.

“Any sell-off in Indian equities, triggered by tapering/ tightening scare on Wall Street will provide opportunities to add to Indian equities, most particularly if this coincides with a further likely rise in the oil price on an accelerating re-opening of the global economy,” Wood wrote.

Shaktikanta Das has been given an extension of another 3 years as RBI Governor, hence expect no major rate hikes as he is expected to toe Govts line in keeping a low-interest rate regime.

FIIs now have been the net sellers in the last 7 consecutive months, while DIIs are the net buyers, retail participation has grown considerably and again played a big role in the current rally. Post correction it is recommended to shift around 10% from Debt to Equity in this month.

Wish you & your loved ones a Happy & Prosperous Diwali!