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Market Outlook – December 2022

“Never invest at unreasonable valuations. Never run for companies which are in limelight.” – Rakesh Jhunjhunwala – Indian Businessman, Ace Investor & Stock Trader

After a fall in September, Indian markets had a strong comeback in October. November has been a month of consolidation. Markets continue to be focused on Indian fundamentals, as the domestic money is the key driver and is now less influenced by the global happenings.

Positives in November:

  • China saw relaxations in Covid restrictions. 
  • In the US, lower than expected inflation number has raised hopes of a policy pivot.
  • European gas prices have fallen as they seem to be well provided for winters. Logistic costs have come down as well.
  • Oil prices has fallen below USD90 for brent. A USD10 fall in oil prices is a USD12/13 billion saved for our country.
  • Q2 result season has ended. The season was stronger than expected on profits. Q3 results would have the benefit of a strong festive season sales and a relatively weaker base.

India foreign exchange reserves rose $2.89 bn to $550.14 bn for the week ended November 25. The Reserve Bank announces the launch of the first pilot for retail digital Rupee (e₹-R) on December 01, 2022. The pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real time. Different features and applications of the e₹-R token and architecture will be tested in future pilots, based on the learnings from this pilot. India has become the first country to launch its own digital currency.

November Outlook: we expect markets to continue its positive run, but with a limited upside (Nifty Target levels – 19.5k on the upside and 17.5k on the downside). If US CPI nos. print a higher no., markets gain may reverse as Fed will continue with 75 bps rate hike.

Though Nifty & Sensex touched record highs, it was not a broad-based rally, with limited participation by mid-cap and small-cap stocks. Only five stocks including Reliance, TCS, HDFC Bank, Infosys & HDFC Ltd. accounted for over 50 percent of the increase in the Nifty 50’s market capitalisation, over the past two months.

Analysts have started increasing targets for the Sensex and the Nifty, even though economic growth estimates have been lowered by the foreign and the local brokerage houses, the International Monetary Fund, the Reserve Bank of India and the rating companies including S&P Global, Moody’s and Fitch. Investors now await RBI’s bi-monthly policy on December 5-7 for further cues. Monthly auto numbers, PMI and inflation numbers will also be watched.

Key Economic Events to watch a) 7th Dec: RBI Policy decision; b) 13th Dec: US CPI; c) 14th Dec: US Fed fund rates decision

Happy Investing!

Market Outlook – November 2022

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

— Peter Lynch (American investor, mutual fund manager, and philanthropist.)

Markets have gained month-on-month, but Year-on-Year it is still at-par levels. Valuations are also stretched and with mixed quarterly results, upside remains capped. Markets can break previous highs but will mostly remain range bound.

Major Events in October & its impact on markets:

  • Fed Rate Hike: Fed hiked its interest rate by 75 bps, increasing it from 3.25% to 4%. This is the fourth consecutive rate hike of 0.75% and the sixth rate hike this year. These rate hikes are the fastest cycle in history, pushing borrowing costs to a 15-year high. The Fed has struggled to reduce inflation. The annual inflation rate in Sept. 2022 was 8.2%.

Impact – Negative. Markets have risen post rate hike, expecting rate hike cycle to end soon and inflation also peaking out. If data comes opposite of this, markets may correct again.

  • Decline in Crude Oil Prices: Crude oil prices have corrected below USD 100 per barrel mark and trading around 90’s level.

Impact – Positive. Low crude prices will help bring down inflation, hence pause in interest rate hikes by Central Banks.

  • Ukraine-Russia War Continues: There is still no sign of de-escalation of current war. Though Russia is pressured to restart peace talks, but the response remains muted.

Impact – Negative. Winter has started and Europe is heavily dependent on Russia for gas supply. Any further escalation may lead to a higher energy price, keeping inflation elevated.

  • Q2 Results: The 2QFY23 corporate earnings have been in-line thus far with heavyweights, such as RIL, HDFC Bank, SBI, TCS, ICICI Bank, and Infosys, registering in-line aggregate performance.

Impact – Positive. The spread of earnings has been decent with 70% of declared results meeting or exceeding profit expectations. However, the growth is being led by just BFSI and Autos with Metals, Oil & Gas and Cement posting a YoY earnings decline.

Heavy selling by FIIs has paused and inflows are clearly visible, which has led to market advance steadily in October. All eyes will be on US November CPI Data. High numbers will again bring FIIs selling, while a fall in CPI data will bring new highs for markets.

November Outlook: we expect markets to continue its positive run, but with limited upside (Nifty Target levels – 19k on the upside and 17.5k on downside). Qtr2 numbers till date has been in-line barring few sectors. We expect inflation to cool down and with it the rate hike cycle as well.

Happy Investing!!!

Market Outlook – October 2022

Has the Golden Era of the Indian Economy started?

Dark clouds have gathered over the global economy. The inflation rate in the United States has surged to 9.1 percent, the highest in 41 years, because of the COVID-19 period fiscal stimulus, as well as supply chain problems caused by the Ukraine war, aftereffects of the pandemic, and the recent lockdowns in China.

As the US Fed continues to tighten monetary policy, there are fears of a recession in the US. The US treasury yield-curve has seen its steepest inversion in 12 years, generally considered as a harbinger of recession. The head of the IMF recently warned of the rising risk of global recession in the next 12 months. Price of crude oil has fallen below $90 per barrel, and multinational corporate giants have started cutting jobs. As if the global news was not bad enough, closer home the Sri Lankan economy collapsed, triggering fears, will it be India’s turn next?

India is not insulated from the global upheavals. Growth projections have been revised downwards in the last few months, as exports will take a hit. However, the status of economic stability parameters is encouraging, and the strong fundamentals of the economy can de-risk it from global shocks.

GDP growth projections for 2022 are still the highest for India compared to its emerging market peers. High frequency indicators such as passenger car sales, two-wheeler sales, electricity production, and bank credit have risen in June for the second month in a row. The unemployment rate in June (7.8 percent as per CMIE) is higher than in May, but a lot lower than it was in February (8.11 percent).

While net foreign direct investment (FDI) continues to rise (the latest figure in April was $5.03 billion, up from $2.74 billion in March), foreign portfolio investors have been pulling out. The capital outflow combined with a return of current account deficit (CAD) has led to a slight deterioration in the official forex reserves causing concerns.

Q: So overall how India is able to hold strong, when the world is falling?

Ans: Smart Micro & Macro level management of economy.

Better COVID Management: India was able to produce and vaccinate its entire population twice, which was a remarkable achievement and helped control COVID pandemic. China, which is the manufacturing hub of the world, due to its mismanaged zero COVID policy has seen frequent lockdowns and led to supply chain problems around the world.

Neutral Russia-Ukraine Stance: India smartly maintained a neutral stance during the Russia-Ukraine conflict as it realised that sharp rise in crude prices will hit it badly. Hence it bargained with Russia for cheaper oil & gas supply even when the entire world was sanctioning Russia for the same. End-result, energy prices in Europe has doubled starring at a long & harsh winter with power cuts looming and inflation rising to record 10%.

Kept Inflation in check: India did not pass-on the crude price hike to its people, immediately banned key foodgrain exports so that there is no shortage internally, resulted into controlled inflation as compared to its world peers. A good monsoon and brent crude falling means that inflation will start falling in 2nd half of the financial year.

Make-in-India Policy: With an eye on becoming World’s largest manufacturing hub, India started the Make-in-India initiative by providing PLI (Performance Linked Incentives) to the business community. India knew that World was looking for an option to China which is troubled by constant COVID lockdowns, Taiwan Conflict & constant policy changes. With Power shortage in Europe now, India is looking for both China +1 and Europe +1 policy. Early results of this initiative have started to bear results with India becoming a net exporter of capital goods from net importer for so many years. India has become a manufacturing hub for mobile phones as the exports have doubled in one year, with almost all major brands setting up factories in India.

Robust DIIs market participation: Market participation by retail investors have gone up considerably, with a buying of 2.46 Lakh Cr against a sell-off of 2.84 Lakh Cr by FIIs in last one year in the cash market. People have realised that equity market is the only option available to beat inflation and create wealth. Constant SIP flows have helped DIIs to do the unthinkable, i.e., holding of markets despite heavy selling by foreign peers. Since India now is the only shining star in the whole world, FIIs will be forced to invest in Indian markets sooner or later. Though Indian markets are pricey at present, but better product always command a premium and that is why markets are not correcting as expected.

So, India is at a sweet spot and any correction due to foreign noise should be aggressively bought. Next decade is ours and a signal of massive wealth creation. So don’t be distracted with rumours or negative noise. Act sensibly and go for equities rather than FDs, Gold or Real Estate. India Story has arrived.

Happy Investing!

Market Outlook – September 2022

Q: How much is our return expectation?

A: 15% CAGR over 10 years.

Q: How patient are we with our investments?

A: Less than 6 months.

A year before, Nifty was trading at 17,368 and it is at 17,540 levels, at present. In between it went down multiple times, and even touched a low of 15,183. Different clients, entering at different levels, would have experienced different returns, in the same period. Client investing a lumpsum amount a year back would be at same levels, whereas a client entering at years low, would see a 15% jump in their returns. Clients using an SIP mode of investment, would see a 5% growth, and Clients having started an SIP 5 years back, would have generated a 15% CAGR returns.

5 Year SIP, as per Moneyfrog model, would have fetched even higher CAGR returns, over a traditional method of investing. Therefore, the key to investment is valuation, right allocation, timing & patience. Do not jump to the conclusion, in a short period of investing and above all, do not fear. Thumb rule is to keep investing regularly (i.e., monthly) and give time for markets to perform.

September Outlook: Nifty jumped from 17,340 to 17,759, a mere 2.4% jump. It remained range bound throughout the month and unable to break the 18K levels. Nifty PE is trading at around 21, which is above fair value. FIIs were the net buyers with 22K Cr buying and DIIs were sellers with 7K Cr selling in the cash market. RBI increased the repo rates by 50 bps to 5.4% and expected to raise it further in next policy meet. Inflation cooled of from 7.01% to 6.71% mainly due to fall in oil prices.

Key Economic Events: 1) Sep 13: US CPI; Sep 21: 2) FOMC Rate Hike decision, new Dot Plot (75 bps hike expected); 3) Sep 30th: RBI MPC meeting.

Festival season has begun, and monsoon this year also has been good. We expect a bumper sale across all sectors this year. Celebrations are on with no Covid restrictions this year, which will have a positive impact on consumption sales. Except Fed rate hike, where we do not see any major negatives this year and hence remain positive on markets breaking new highs. Any further fall may be treated as the last chance of entering at the market lows.

Happy Investing!!!

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

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.