Market Watch
Equity Market Overview – July 2024
Domestic Equity Market Update
Indian equities ended the month on a positive note. Large cap-oriented BSE Sensex and Nifty 50 ended higher to the tune of 3.43% & 3.92% (MoM) respectively. While the BSE Midcap & Small cap indices ended higher by 5.36% & 6.14% (MoM) respectively.
In terms of BSE sectoral indices, Infrastructure was the top performer. In contrast, Bank Index, Realty Metal underperformed the most.
During the month, FPIs were net buyers in equities to the tune of Rs 308 bn (as on 30th July 2024).
Indian equities ended the month on a positive note buoyed by the government's commitment to improving consumption and bridging the gap for energy transition in the Budget. Improved FPI flows, along with the hope for a strong monsoon further aided the sentiments. Hike in capital gains tax was the key dampener in the Union Budget FY25.
Global Market Updates
US equites ended the month on a positive note after the Labor Department data showed that U.S. nonfarm payroll employment shot up by 206,000 jobs in June 2024 and the U.S. consumer price index slipped by 0.1% MoM in June 2024 after coming in unchanged in May 2024, which has led to growing expectations that the U.S. Federal Reserve could soon cut its benchmark rate.
European equity markets mostly rose after positive economic indicators from the U.S. such as the U.S. personal consumption expenditures (PCE) price index inched up by 0.1% in June 2024, which matched economists' expectations and raised expectations of the U.S. Federal Reserve rate cut this year.
Brent crude price fell from USD 85.38 per barrel to USD 81.20 per barrel amid concerns about the outlook for demand due to the economic deceleration in China. Moreover, the drop in prices is a result of the recent geopolitical events regarding the ceasefire negotiations in the Israel-Hamas war.
Most of the Domestic Macro data points showed a strong picture
The International Monetary Fund (IMF) raised its projection of growth in India’s GDP for FY25 by 20 bps to 7% YoY amid a boost in private consumption, especially in rural areas.
As per the Asian Development Bank (ADB), India’s stronger-than-expected fiscal position could provide a further boost to its growth, while keeping the GDP growth projection for FY25 unchanged at 7% YoY.
As per the Economic Survey 2023-24, the Indian economy can grow at more than 7% YoY a sustained basis in the medium term if the country can build on the structural reforms undertaken.
As per Economic Survey 2023-24, registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of March 31, 2024, potentially translating into 20% of the Indian households now channelling their household savings into financial markets.
As per Economic Survey 2023-24, the total number of start-ups recognised by the DPIIT has increased from 300 in 2016 to 117,254 at the end of December 2023.
As per RBI, India provisionally created 46.7 mn jobs in the FY24, taking the country's total employment to 643.3 mn. The country's employment growth rate stood at 6% YoY in FY24, versus 3.2% YoY in FY23.
As per RBI, overseas Indians deposited close to USD 3 bn in NRI deposit schemes in April-May FY25, which is over four times higher than the amount deposited in these schemes in the same period last year.
As per NSO, India’s Industrial output advanced 5.9% YoY in May 2024, faster than the 5.0% YoY rise in April 2024. Economists had expected the growth to ease slightly to 4.9% YoY.
As per CMIE, the unemployment rate rose to an eight-month high of 9.2% in June 2024, up from 7% in the May 2024. It was 8.5% in June 2023.
As per the finance ministry, total gross liabilities of the government increased to Rs 171.78 trillion at the end of March 2024 from Rs 166.14 trillion at December 2023. This represented a 3.4% QoQ increase in Q4 FY24.
According to the data released by the Ministry of Commerce and Industry, growth in the output of eight key infrastructure industries known as the core sector slowed to 6.3% YoY in May 2024 from 6.7% YoY in April 2024.
The HSBC final India Manufacturing Purchasing Managers Index (PMI) compiled by S&P Global recovered to 58.3 in June 2024 as compared to 57.5 in May 2024 and 58.8 in April 2024, supported by an increase in new orders, output, and a record upturn in employment.
As per flash survey by HSBC Holdings Plc, the services purchasing managers’ index rose to 61.1 from 60.5 in June 2024., while the manufacturing purchasing managers’ index increased slightly to 58.5 from 58.3 in June 2024. That drove the composite PMI to a three-month high of 61.4 in July 2024 from 60.9 the previous month.
According to data released by the ministry of railways, Indian Railways witnessed a 10% YoY increase in freight loading in June 2024, marking a rare double-digit rise in its goods transportation in the past few months.
As per AMFI, In June 2024, inflows into equity mutual funds rose to Rs 406.08 bn in June 2024, up from Rs 346.97 bn in May 2024, with more than half of the inflows coming from sectoral/thematic funds.
According to a report by Redseer Strategy Consultants, the Indian fast fashion industry is projected to burgeon into a massive USD 50 bn market by FY31, indicating a promising future.
According to an analysis by CRISIL Ratings, advertising demand from key sectors combined with a steady subscriber base is projected to boost total revenue for regional print media companies by 8-9% YoY in FY25.
According to CareEdge Ratings, the two-wheeler industry is expected to sustain a steady volume growth in FY25 driven by improved domestic sales and good traction in executive and premium segment motorcycles.
According to a recent report by ICRA, the Indian auto component industry is projected to see a moderation in revenue growth to 5-7% YoY for FY25, following a robust 14% YoY growth in FY24, on account of slower domestic original equipment manufacturer (OEM) segment growth and subdued export demand.
According to the latest SIAM data, automobile exports from India rose 15.5% YoY in Q1 FY25 with all verticals, barring three-wheelers, recording growth in shipments. Overall shipments stood at 1,192,577 units in Q1 FY25, as compared with 1,032,449 units in Q1 FY24.
According to data from the Goods and Services Tax Network, India saw 103.1 mn e-way bills in May 2024 and a record 103.5 mn e-way bills in March 2024. Last year, it surged past 100 mn in October 2024.
As per industry body ACMA, the turnover of the automotive component industry rose by 9.8% YoY to Rs 6.14 trillion for FY24. The industry had reported a turnover of Rs 5.59 trillion in the FY23.
From Nifty 200 universe, 84 companies have announced their Q1FY25 earnings thus far. At an aggregate level, Sales, EBITDA and PAT have grown by 12.75%, (-)1.16% and 6.16% YoY, respectively, suggesting muted performance. Excluding Financials, Sales, EBITDA and PAT have grown by 7.40%, (-)5.11% and (-)8.25% YoY respectively.
Outlook & Investment Strategy
Going forward, Indian equity market is likely to be driven by incoming macro data points and FPI/DII flows. Furthermore, quarterly earnings result will be a key monitorable. Thus far, the earnings performance for large companies seems to be patchy.
US Economy is seeing incremental weakness with mixed data points coming through. US Personal consumption expenditures (PCE) price index came in unchanged in May after rising by 0.3 percent in April. The unchanged reading matched expectations. The market participants feel that cooling inflation and less frothy economic activity could lead the US Fed to cut interest rates in near term. Market believes that Fed could start cutting interest rate sooner than earlier expected due to signs of weakness seen in US Jobs market. Elections in the US have also become interesting after Joe Biden moving out of the race.
In the Indian Union Budget FY25, the Government has remained on the path of fiscal consolidation, which was better than what was estimated in the interim budget, while keeping a steady balance between growth and welfare schemes. For the Equity market the key irritant in the budget was the hike in the short-term capital gains tax and the long-term capital gains tax. Over the long run, gradual reduction in the fiscal deficit, would lead to ratings upgrade for India, which could structurally drive down the cost of capital for the economy and act as a booster for Indian corporates and investors. In a situation of improving domestic fundamentals, rising corporate profits, strong investment demand and improvement in consumption (with better employment opportunities), we think that the Indian economy would be well positioned to deal with the changing geo-economic dynamics.
The Q1FY25 earnings have begun on a weak note, where the weakness in margins seem to be impacting the overall profitability and would be a concern for the market, going forward.
In terms of valuations, the Largecap indices seems to be relatively reasonably valued than the Smallcap and Midcap indices. Overall, the valuations across the board are relatively high as India’s MarketCap to GDP is now closer to a record~ 145%. Asset allocation rules should be adhered to strictly at this time in the market and the investors should lower their return expectations from the equity markets as the returns witnessed in the past couple of years may not be repeated in the medium term.
Investment deployment strategy could continue to be at 40% lumpsum and rest 60% to be staggered over the next 5-6 months. Investors can look to focus on categories like Largecap, Flexicap, Value, Multicap, Equity Hybrid and Multi-asset funds. Aggressive risk profile investors may look at Business Cycle fund category. All allocations should be done in line with the risk profile and product suitability of the investor.
Debt market overview for the month of July 2024
Domestic banking system liquidity remained in the surplus during the month. Banking system liquidity as measured by the Reserve Bank of India’s (RBI) net Liquidity Adjustment Facility (LAF) stood at a daily average surplus of ~Rs 1.03 trillion in July 2024 as against a daily average deficit of ~Rs 547 bn in the previous month. The call money market traded in the range of ~5.75-6.67% during the month.
Domestic G-secs yields closed lower in July 2024, and the 10-year benchmark, 7.10% G-Sec 2034 bond, ended at 6.93%, compared to the previous month’s close of 7.01%. Indian G-sec yields fell, tracking the fall in the US Treasury yields on increased expectations of a rate cut by the Fed in September 2024. Furthermore, yield moved lower due to decline in crude oil prices, foreign flows regarding the index inclusion and lower than expected fiscal deficit for FY25 in the Union Budget. However, the fall in yield was limited as the market borrowing in the budget was higher than the market expectations. In another development the RBI decided to exclude all new government securities of 14-year and 30-year tenors from the Fully Accessible Route (FAR) suite of bonds.
Inflation in the US and Europe remains above the central banks’ target of 2%. Inflation based on the Consumer Price Index (CPI) in the US slowed to 3.0% YoY in June 2024 from 3.3% YoY in May 2024 and market expectations of 3.1 % YoY. The core CPI in the US slowed to 3.3% YoY in June 2024 as compared to 3.4% YoY in May 2024 and market expectations of 3.4% YoY. The US real GDP surged by 2.8% YoY in Q2 CY24, higher than the growth rate of 1.4% YoY in Q1 CY24 and market expectations of 2.0% YoY. The US Federal Reserve (Fed) announced its widely expected monetary policy decision to leave the federal funds rates unchanged at 5.25-5.50% but opened the door to reducing borrowing costs as soon as its next meeting in September 2024 as inflation continues to trend downwards in-line with the Fed’s 2% target. The US trade deficit rose to USD 75.1 bn in May 2024 from a revised USD 74.5 billion in April 2024. In the Eurozone, CPI decelerated to 2.5% YoY in June 2024 as compared to 2.6% YoY in May 2024. The European Central Bank (ECB) kept the key policy rates unchanged with main refinancing rate at 4.25%, after lowering them for the first time in five years in June 2024 meeting, as policymakers worry about the sticky inflation. According to the National Statistics, the UK’s CPI-based inflation growth rate remains unchanged at 2.0% YoY in June 2024 as compared to 2.0% YoY in May 2024. The real GDP of UK grew 0.4% YoY in May 2024 after showing no growth in April 2024 as wet weather damped consumer spending and construction activity. According to the National Bureau of Statistics, China’s CPI inflation eased to 0.2% YoY in June 2024, following a 0.3% YoY gain in May 2024. The People's Bank of China lowered the one-year loan prime rate to 3.35% from 3.45%. Similarly, the five-year LPR, the benchmark for mortgage rates, was trimmed to 3.85% from 3.95% in China.
Domestically, India’s CPI-based inflation for June 2024 accelerated to 5.08% YoY, higher than 4.75% YoY for May 2024 and the market expectations of 4.8% YoY. Inflation came in higher due to increase in food inflation mainly on account of rise in prices of vegetables, pulses, and cereals. Core CPI inflation marginally quickened to 3.14% YoY in June 2024 as against 3.12% YoY in May 2024. As per the RBI Governor, with the inflation rate hovering around 5% YoY, it is premature to have any discussion on rate cuts. Wholesale Price Index (WPI)-based inflation rose for the fourth consecutive month in June 2024 to a 16-month high of 3.36% YoY from 2.61% YoY in May 2024, primarily due to adverse base effect and a sharp spike in food prices. India's merchandise trade deficit narrowed to USD 20.98 bn in June 2024 compared to USD 22 bn in May 2024 as imports fell more than exports. In the Union Budget for FY25, the fiscal deficit is estimated at 4.9% of GDP for the FY25, better than the 5.1% projected in the interim budget announced in February 2024. Furthermore, the net market borrowing was lowered to Rs.11.63 trillion for FY25 in the Union Budget from Rs. 11.8 trillion announced in the interim budget. The net direct tax collection grew 19.54% YoY in FY25 to over Rs 5.74 trillion as of July 11, 2024, on higher advance tax payment by corporates. As per media report, India's gross Goods and Services Tax (GST) collection for June 2024 stood at Rs 1.74 trillion, marking 7.7% YoY growth. This growth is notably lesser than the 12.4% YoY and 10% YoY increases recorded in April 2024 and May 2024, respectively.
While the banking system liquidity has improved recently on the back of government spending and FPI flows led by JP Morgan Bond Index inclusion, the RBI remained nimble in liquidity management to remove the excess liquidity. The call money rates are moving between the Repo and Standing Deposit Facility (SDF) corridor. In the Union Budget, the central government has remained on its fiscal consolidation path, with the fiscal deficit target of below 4.5% of GDP for FY26, which has been taken positively by the bond markets. However, with the elevated food inflation, the RBI governor has suggested that the Central Bank may remain actively disinflationary and may not change its stance until the it gains confidence that the inflation is trending downward on a durable basis. In the US, while keeping the policy rates unchanged, the Fed has opened the door to reducing borrowing costs in its next meeting in September 2024 as the inflation is trending downward and employment dynamics are weakening. On the other hand, the ECB kept the rates unchanged in July policy meeting after cutting in June and also left the September’s meeting decision ‘wide-open’ due to stalled disinflationary process in the Europe. Domestically, the flows regarding the index inclusion and expectation of inflation to ebb lower in the current quarter due to base effect may support the yields in the medium term. Furthermore, in the medium term, the market is likely to take cues from the US bond market, movement of the USD/INR pair and the liquidity measures of the RBI. In India, as the deceleration in the inflationary trend starts, the RBI may become accommodative on the system liquidity. Hence, the shorter end of the yield curve may react more than the longer end, which has already reacted due to favourable supply-demand dynamics.
Fixed Income Mutual Fund investment strategy:- With the long end of the curve remaining lower, gains from duration play could be limited in the near term. Accrual opportunities at the 2-4-years segment of the corporate bond curve remains attractive for incremental investment, from risk-reward perspective until fresh triggers appear to suggest further decline in yields at the longer end. Hence, investors can look at Corporate Bond Funds and Short duration funds for a horizon of 15 months and above. For a horizon of 3 months and above, investors can consider Arbitrage Funds. 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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