“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.