Equity Market Overview - Sept 2023
Domestic Equity Market Update
Indian equities ended the month on a positive note. S&P BSE Sensex and Nifty 50 ended higher to the tune of 1.5% and 2.0% month-on-month (MoM), respectively. The S&P BSE Midcap and Smallcap indices ended higher by 3.7% and 1.1% MoM, respectively.
In terms of BSE sectoral indices, Infra, Power, and Metals were the top performers. In contrast, FMCG, Bank Index, and IT were the key laggards.
During the month, FPIs were net sellers in equities to the tune of Rs 147.68 bn.
Lower than expected CPI print, strong IIP data, and continued thrust on capex by the government lent support to the market. However, FPI selling, weak global cues, surging crude price, and instances of profit booking capped the gains.
Global Market Updates
US equites ended the month on a negative note. The Federal Reserve guided for 1 more rate hike in 2023, besides hinting at a ‘hawkish-for-longer’ stance to tame inflation. Bond yields in the US hit multi-year highs, thus adding to the strain on equities. The possibility of a global economic slowdown accentuated the impact. That said, positive macroeconomic data points restricted the downside.
European equities ended the month on a negative note mainly owing to volatility in the US market, weak macroeconomic data points, and higher crude prices. The European Central Bank hinted at the conclusion of its monetary tightening cycle, although rates are likely to remain elevated given the inflationary scenario. The Bank of England kept its policy rate unchanged during the month.
Brent crude price rose from USD 86.86 per barrel to USD 95.31 per barrel during the month. Supply side disruptions linked to output cuts announced by Russia and Saudi Arabia, coupled with lower-than-expected crude inventory in the US, were the key contributors to the upmove. Hopes linked to China’s economic revival also lent support to the price.
Key Domestic Macros
As per the Reserve Bank of India (RBI), India’s forex reserves declined by USD 2.335 bn to USD 590.702 bn for the week ended September 22, 2023.
As per the RBI, bank credit rose by 14.9% YoY till August 25, 2023, compared to 15.5% YoY previously. The outstanding credit was Rs 143.17 trillion. Banks raised deposits at a higher pace of 12.3% YoY in August 2023 against 9.5% YoY in August 2022.
As per the RBI, credit card spending among Indians rose 2.67% MoM to a new high of Rs 1.48 trillion in August 2023, from Rs 1.45 trillion in July 2023. The uptick was supported by a healthy increase in Point of Sale (PoS) and e-commerce payments. The transactions at PoS increased by nearly 6.7% MoM to Rs 529.61 bn, whereas e-commerce payments jumped to 956.41 bn.
The RBI has announced that it will discontinue the incremental cash reserve ratio (I-CRR) in a phased manner. RBI will release 25% of the I-CRR maintained on September 9, 2023, and another 25% on September 23, 2023. The remaining 50% of the I-CRR maintained will be released on October 7, 2023.
India's WPI based inflation stood at -0.52% YoY in August 2023 as compared to -1.36% YoY in July 2023. WPI-based inflation is in the negative territory for the fifth month in a row.
According to MoSPI, the CPI based inflation for the month of August 2023 came at 6.83% YoY as against a high of 7.44% YoY in July 2023. Food inflation fell to 9.94% YoY in August 2023 against 11.51% YoY in July 2023. Inflation remains above the RBI’s 6% upper tolerance band, implying that the repo rate may continue to remain static for a while.
IIP growth for July 2023 came at 5.7% YoY vs 4.8% YoY in June 2023. For July 2023, the IIP stood at 142.0. For mining, manufacturing and electricity sectors for the month of July, the IIP came at 111.9, 141.2 and 204.0 respectively.
As per Ministry of Finance, the Indian government's net direct tax collections rose 23.5% YoY to 8.65 trillion rupees (USD 103.9 bn) in April-Sept. 16, 2023. The tax collection includes corporate tax of 4.16 trillion rupees and personal income tax of 4.47 trillion rupees. Healthy tax buoyancy bodes well from a fiscal prudence perspective.
Government data showed that India's exports declined by 6.86% to USD 34.48 bn in August 2023 as against USD 37.02 bn in August 2022. Imports too declined by 5.23% to USD 58.64 bn as against USD 61.88 bn recorded in August 2022. India's trade deficit, which shows the difference between imports and exports, stood at USD 24.16 bn.
According to S&P Global, India's services purchasing managers' index (PMI) came out to be 60.1 in August 2023, lower than the 62.3 recorded in July 2023. Sustained economic activity and hiring sentiment hints at stable employment trends.
According to the FADA, India's auto sales in August 2023 grew by 9% YoY, slightly lower than previously reported figures. Sales increased across various vehicle categories, with two-wheelers up by 6% YoY, passenger vehicles by 6.5% YoY and commercial vehicles by 3% YoY. Three-wheeler sales saw the biggest jump, increasing by 66% YoY.
According to the oil ministry data, the consumption of diesel rose 5% YoY while that of petrol increased 3% YoY in August 2023 on increased mobility and economic activity. Jet fuel sales jumped 14% YoY while liquefied petroleum gas (LPG) consumption grew 3% YoY in August 2023. The overall consumption of refined fuels rose 6.5% YoY in August 2023.
According to the government data, India’s power consumption grew by over 16% YoY to 151.66 bn units in August 2023 due to increase usage of cooling appliances during sultry weather. Economic traction and deficient rainfall in September 2023 in most regions of the country could lead to a further uptick in power demand.
The Organisation for Economic Cooperation and Development (OECD) has raised India’s GDP growth projection for FY24 to 6.3% YoY, up from the previous estimate of 6% YoY. Compared to other major economies, India continues to be an outlier in terms of growth prospects.
The Asian Development Bank (ADB) revised India's growth forecast for FY24 to 6.3% YoY, a change of 10 bps, attributing it to erratic monsoon patterns that are likely to affect agricultural output. The organisation has maintained its growth projection for FY25 at 6.7% YoY, driven by rising private investment and industrial output.
India Ratings and Research upwardly revised its India FY24 real GDP growth estimate to 6.2% YoY from the 5.9% YoY expected earlier. The domestic ratings agency attributed its revision to a variety of factors, including the government's capital expenditure, deleveraged balance sheets of India Inc and banks, subdued global commodity prices and the prospect of private capital expenditure picking up.
As per Fitch Ratings, India's economic growth is likely slow in Q3FY24, despite resilience in the face of tighter monetary policy and weak exports. Fitch has maintained India's growth target for FY24 at 6.3% YoY. By and large, agencies continue to remain positive on India’s prospects.
S&P in its latest quarterly economic update for Asia-Pacific has kept its FY24 growth forecast for India unchanged at 6% YoY due to the impact of a slowing world economy, delayed effects of rate hikes, and the rising risk of subnormal monsoons.
Outlook & Investment Strategy
Going forward, Indian equity markets are likely to be driven by macro data points, global developments, and FPI flows. Weakness in the global growth trajectory could have a cascading impact on corporate earnings for companies with sizable global exposure, while companies with strong a high degree of domestic exposure are likely to be cushioned on the back of a strong economy.
Response of global central banks to the impending slowdown in their economies would be a key monitorable as we move forward. In the recent past, the US Fed chose to keep rates steady, but guided for another rate hike by 2023 end. In addition, the central bank reiterated its hawkish stance by signalling a higher for longer interest rate regime. Consequently, bond yields in the US inched higher and equity markets perceived these developments negatively. By and large, despite rate hikes undertaken thus far, the US economy continues to exhibit strength and the labour market remains steady. Though inflation seems to be tipping lower, it remains above the Fed’s 2% target.
In India, the market continues to expect domestic driven sectors across the board to outperform in the medium term, led by an improving capex cycle and steady demand conditions, with some positioning also being seen in the Pharma sector. Given the ongoing rally, equity valuations have gradually moved into the higher end of the fair value zone. FPI selling in recent times has been a cause of concern.
On the global front, trajectory of interest rates, upward movement in crude price, rising US bond yields, Dollar Index, and state of the Chinese economy are likely to influence volatility for emerging market equities. On the domestic front, the key risks include upcoming state and central elections, weak management commentary, major earnings downgrades, possibility of low agricultural output and its impact on rural India, and probable weakness in consumption sentiment due to elevated inflation levels.
As another note of caution, many stocks across the board, especially in the small and micro cap segments, seem to be rallying without much earnings support or may be witnessing speculative uptick. If the earnings performance in these stocks doesn’t hold up, any negative news can impact these segments disproportionately and may also cause a collateral ripple in the small and midcap spaces, which have delivered substantial alpha over the last 6 months.
Returns over a 2-3 year period are expected to be in line with earnings growth. We continue to maintain an investment deployment strategy of 50% lumpsum and the balance 50% to be staggered over the next 5-6 months. Investors could focus mostly on categories such as Largecap, Large & Midcap, Multicap, and Hybrid Equity funds in line with their risk profile and product suitability.
Debt market overview for the month of Sept 2023
Domestic banking system liquidity moved into the deficit during the month. Banking system liquidity as measured by the RBI’s net Liquidity Adjustment Facility (LAF) stood at a daily average deficit of ~Rs. 178 bn in September 2023 as against a daily average surplus of ~Rs. 1.14 trillion in the previous month. The call money market traded in the range of ~5.70%-6.75% during the month.
Domestic G-secs yields closed higher in September 2023, and the 10-year benchmark 7.26%, 2033 bond ended at 7.25%, as compared to the previous month’s close of 7.17%. Initially, Indian G-sec yields rose tracking the rise in US Treasury yields due to a mixed set of August jobs report in the US and brent crude oil prices crossing the USD 90 per barrel. Furthermore, yields surged due to a sharp rise in overnight indexed swap rates as stop-losses in the derivative instrument were triggered. Sequentially, yields fells aided by better-than-expected CPI print for August 2023 and on the announcement of inclusion of India’s G-secs in JPMorgan's Global Bond Index – Emerging Markets suite. Later, yields surged as continuous selling momentum due to adverse global cues was redoubled after the subdued demand in the weekly gilt auction and comments by the US Fed Chair Jerome Powell. However, the rise in yields was limited, tracking the fall in US Treasury yields and higher demand by the market participants at the attractive valuation.
In the US and Europe, inflation continued to persist above the central banks’ target of 2%. Inflation based on the Consumer Price Index (CPI) in the US accelerated to 3.7% YoY in August 2023 from 3.2% YoY in July 2023. The US’s trade deficit widened to USD 65.0 bn in July 2023 from a revised USD 63.7 bn in June 2023. As per the Institute for Supply Management (ISM), the manufacturing PMI in the US rose to 47.6 in August 2023 from 46.4 in July 2023. In the Eurozone, consumer price inflation slowed down to 5.2% YoY in August 2023 from 5.3% YoY in July 2023 on the back of moderation in energy and food prices. According to the National Statistics, the UK’s CPI-based inflation decelerated to 6.7% YoY in August 2023, below market expectation, from 6.8% YoY in July 2023. As per the National Bureau of Statistics, China’s consumer prices rose by 0.1% YoY in August 2023, reversing a 0.3% YoY drop in July 2023 and remaining below the market expectations rise of 0.2% YoY. The People's Bank of China kept its one-year and five-year loan prime rate (LPR) unchanged at 3.45% or 4.2%, respectively.
On the domestic front, India’s inflation based on the Consumer Price Index (CPI) decelerated to 6.83% YoY in August 2023, lower than the previous month’s growth rate of 7.44% YoY and better than the market expectations of 7% YoY due to decline in vegetable prices. Wholesale Price Index (WPI) based inflation remained in deflationary zone for the fifth consecutive month in a row, with the index declining by 0.52% YoY in August 2023 as against a fall of 1.36% YoY in July 2023, primarily driven by a fall in prices mineral oils, basic metals, chemical products, textiles, and food products. As per the labour ministry, retail inflation for farm and rural workers eased marginally to 7.37 % YoY and 7.12% YoY, respectively, in August 2023 as compared to 7.43% YoY and 7.26% YoY, respectively, in July 2023. The RBI has announced that it will discontinue the incremental cash reserve ratio (I-CRR) in a phased manner. The RBI will release 25% of the I-CRR maintained on September 9, 2023, and another 25% on September 23, 2023. The remaining 50% of the I-CRR maintained will be released on October 7, 2023. India’s trade deficit widened to a 10-month high of USD 24.16 bn in August 2023 as compared to USD 20.67 bn in July 2023 due to higher crude oil prices and robust domestic demand. The merchandise exports stood at USD 34.48 bn in August 2023 as compared to USD 32.25 bn in July 2023, while the imports were at USD 58.64 bn in August 2023 compared to USD 52.92 bn in July 2023. India's current account deficit (CAD) widened to USD 9.2 bn, or 1.1% of GDP, in Q1FY24 as against USD 1.3 bn in Q4FY23, due to higher trade deficit. However, CAD narrowed on a year-on-year basis from USD 17.9 bn, or 2.1% of GDP, in Q1FY23. India's net direct tax collections from April 1 to September 16 of FY24 stood at Rs 8.65 trillion, which is 23.5% higher than the net collections for the corresponding period of the preceding financial year. Furthermore, the gross collections of direct taxes came in at Rs 9.87 trillion till September 16 of FY24, thus registering a growth of 18.3% over the corresponding period of FY23.
While the advance tax outflows and the RBI’s intervention in the forex market are likely causing a pressure on the liquidity, the RBI seems to be comfortable with the current liquidity deficit to drive the overnight and the very short-term rates in line with its desired trajectory. The market participants believe liquidity is likely to remain under pressure in the near term as festival season may lead to outflow and cash leakage from the system. Thus, the RBI is likely to remain nimble in liquidity management and is likely to continue managing liquidity via LAF corridor. The easing vegetable prices are likely to further cool down the headline inflation in September. Additionally, the actions by the government to maintain stability of food prices would be keenly watched. The revival of monsoon in September has raised hopes that food inflation may further ease. With the upcoming festive season, it will be interesting to see how the core inflation holds up as the market expects strong demand traction. Furthermore, weakening currency and rising crude oil prices can also have potential impact on inflation going forward. In the near term, inflation is expected to remain higher due to low base and rising crude oil; yet over the course of the year, it is expected to be contained within the tolerance band (2%-6%) of the RBI. India’s CAD widened on a quarter-on-quarter basis to USD 9.2 bn in the Q1FY24 due to a higher trade deficit, lower services exports, and a decline in the transfer of private receipts. The RBI’s MPC is expected to maintain the status quo at its upcoming policy review meeting due to elevated inflation and global economic factors. While the US Fed kept the policy rate unchanged, its projections suggest one more rate hike by the end of this year. In the US, downward trend of core inflation suggests the Fed is likely to orchestrate a soft landing without causing recession. Domestically, the inclusion of G-secs in global bond indices is likely to result in lower yields and currency appreciation in the long term.
Fixed Income Mutual Fund investment strategy: - With inflation remaining high, yields are likely to continue at elevated levels in the near term. Furthermore, the market expects yields of securities above 1 year tenor to take cues from the US market in the near term. Therefore, it is preferable to take advantage of the relative spreads of Corporate bonds vs G-Sec. With this backdrop and a flat yield curve, staying invested at the 3-5 year segment of the yield curve could be better from a risk-reward perspective currently. Corporate Bond Funds, which typically have a higher yield to maturities in comparison to pure Government Securities Funds, look safe bet at the current juncture. Thus, investors can look at Corporate Bond Funds for a horizon of 15 months and above. Additionally, higher spreads in Corporate bonds as compared to Banking & PSU bonds make Corporate Bond Funds more attractive than the Banking & PSU Funds. For a horizon of 3 months and above, Ultra Short Duration Funds and Arbitrage Funds can be considered. Whereas for a horizon of up to 3 months, investors can consider Overnight Funds and Liquid Funds. Investors can also look at Multi asset allocation funds for a horizon of 36 months and above. Investors should invest in line with their risk profile and product suitability.
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