Markets continued to trend up in August globally. The benchmark indices, Nifty/Sensex, appreciated by 8.7%/9.4%, respectively. Nifty scaled peak of 17000 on the last trading session of the month, while the Sensex hit the 57,000 marks during the month. The rally sustained through the month, with a key difference. This time, it was large-cap stocks that steered the ship, while mid-cap and small-cap stocks experienced certain amount of volatility. The optimism is not limited to Indian markets alone. It is a global rally. Even the key indices US markets hit a new high in August 2021.
For that matter, equity markets globally have shown healthy double-digit gains since the beginning of calendar year 2021. Since January 2021, the MSCI World index has gone up by 17% with all major indices like S&P 500 (20%), Nasdaq (18%), Nifty (22%), FTSE (10%), Taiwan (17%) among others trending up during the year. The only exceptions are China, Hong Kong and Indonesia for country specific-issues; thereby dragging down the performance of MSCI Emerging Market Index this year. Among the key developments during the month, first, the RBI retained status quo on interest rates. India’s CPI inflation declined after a two-month gap to 5.59%, well within the RBI’s target range.
Thought RBIs has increased the outlook on inflation over the next few quarters, the central bank re-iterated its commitment to keep its monetary policy stance accommodative. Second, the Q1 result season turned out to be another quarter of healthy growth in profits of corporate India. Almost 42% of Nifty companies exceeded our and the consensus’ expectations. Wave 2 of the pandemic did lead to moderation in earnings estimates for FY2022 but expectations for FY2023 inched up further during the result season. Most management commentaries on earnings outlook remained positive given improving economic activity post the second wave and an anticipation of strong revival in demand.
Another news on the macro front was the 20.1% growth in India’s GDP growth for Q1 (April-June) FY2022. It is largely in line with expectations and driven by low base effect, surging exports (up 66.9% to $163.7 billion) and better performance from manufacturing sector. On the other hand, the services sector continues to lag due to adverse impact of wave 2 of pandemic. The high frequency economic data for July/August indicate sharp revival from economic from wave 2 of pandemic, be its GST collections, e-way bill generation, exports and surge of manufacturing PMI to 55.3 in August 2021.
Going ahead, the key monitorable for the equity market would be - consumer demand in the upcoming festive season, Q2 results season and any development on the tapering of the bond buying program in US. Recently, the US Fed chair has indicated that the time is ripe for look at gradually reducing the monthly cash infusion of $120 billion in the bond market though there is no reason to look at hike in interest rates in the near future. Markets expect the timeline to become clearer by November. At the same time, the markets would also have to deal with news flow in the run-up to the all-critical UP state elections.
It would be first big test of the ruling government as the opposition parties would look to exploit the issue of growing protests against the farm laws. From an investor’s perspective, valuations are not cheap anymore and the phase of easy money driven by expansion of valuation multiples is largely behind us now. Thus, investors need to be more selective now. However, the expected economic and corporate upcycle would throw up many attractive investment opportunities for patient investors. Happy Investing!