Our Market View

Sanjiv Mehta  |  2023-10-10

September 2023 was a month of two contrasting halves, in the first half Nifty 50 crossed the important milestone of 20000 but quickly came down in the second half. Midcap and small cap indices had a similar story and though all these indices ended with gains of 2%, 3.88%, and 4.12% respectively, the fast decline generated an uneasy feeling.

Factors attributed to causing this fast correction are mainly global. Troika of Oil prices, USD 10-year yields, and USD strength, which are always cited as risk factors for the emerging markets, all moved unfavorably. Brent prices, which were hovering around $75 in July 2023, started moving up to reach a level of $94 on Sep 27 due to production cuts by Saudi Arabia and Russia. The Federal Reserve had stated clearly that their inflation goal remains firmly at 2%, and therefore the probability of interest rates remaining higher for a longer time is very high. It seems that finally the markets have started believing their assertion and therefore, during the same period of July-Sep 2023, USA 10-year treasury bond yields moved up by a full 1% to 4.8%. This was accompanied by a steep elevation of the third factor USD index too, from 99.5 to above 107.

The Treasury yield rise got fresh fuel with a strong USA non-farm payrolls report declared on Oct 6, 2023. It showed that USA job growth surged in September, suggesting that the labor market remains strong enough for the Federal Reserve to raise interest rates once more, though wage growth is moderating. Market in a way is already doing the tightening for the Fed, and a run at the 5% mark in 10-year yields is likely.

However, on the positive side, the latest India Development Update (IDU), the World Bank’s flagship half-yearly report on the Indian economy, released on Oct 3, 2023, states that India’s growth will remain resilient despite global challenges. It projects India to grow at 6.3% with various economic parameters continuing to be positive. This resilience is underpinned by robust domestic demand, strong public infrastructure investment, and a strengthening financial sector. Bank credit growth increased to 15.8% in the first quarter of FY24 compared with 13.3% in the first quarter of FY23. They expect the volume of foreign direct investment to grow in India as a rebalancing of the global value chain continues.

The RBI monetary policy committee kept the interest rates at the same level for the fourth straight monetary review meeting on Oct 6 and also maintained the stance of withdrawal of accommodation. It maintained its economic growth forecast for FY 24 at 6.5%, RBI governor Mr. Shaktikanta Das said that the financial institutions are in fine fettle with robust balance sheets and the capital expenditure is increasing. He also drew comfort in the fact that core inflation is declining and kept inflation estimates for FY24 unchanged at 5.4%. He also said that RBI will take prompt action if a rout in global bonds leads to spillovers.

Geopolitically, India had a major accomplishment in achieving a G20 consensus, thus affirming India’s strong network of relationships and its determination to marshal those to build a meaningful agreement. Moreover, India successfully advocated the inclusion of the African Union as a permanent G20 member. Also of immense interest was India, the US, UAE, Saudi Arabia, France, Germany, Italy, and the EU signing an MOU for a connective corridor from India to Europe via the Middle East- the new spice route. Chandrayan 3’s successful landing on the Moon’s south pole on August 23 shows that planets are aligned in India’s direction and adds significantly to India’s global stature and branding. The inclusion of India’s debt in JP Morgan EM index may lead to inflows of billions of dollars into India and in the medium term will help in lowering bond yields, cost of capital, and boosting the value of INR.

Overall, the view remains entrenched that India continues to be an oasis in a desert, but currently there is a sandstorm blowing because of global conditions. Similar to last month, the recent developments continue to reinforce our view that long-term economic growth in India is intact and the consequent equity uptrend remains secure. The correction may continue for some time but eventually, the trend is likely to resume soon and the expectation of good corporate earnings numbers in Oct 2023 could be a trigger. Companies making up the Nifty 50 are expected to report another quarter of robust aggregate profit growth in Q2 FY 24 (Jul-Sep quarter of 2023) and the expected figure is 37%. This is facilitated by moderating commodity prices, a lower base effect, and standout performances by select automotive and financial businesses.

Consequently, for the medium-term goals (anything above 3 years), allocation to equities should remain on the higher side. Fresh money could be invested in tranches, utilizing the STP route- systematic transfer plan. Also as always, with the global uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies

Similarly, for short-term goals, equities because of their volatile nature, should not be deployed. Equity savings schemes, because of their hybrid nature, may be deployed for goals with a time horizon of 2-3 years.

At this stage, profit preservation should totally be related to the individual goals and not because of the market view. If the time horizon of a goal has lessened or if we are close to the target amount, it is sensible to preserve profits. It is important to utilize high-quality schemes with a strong track record selected on the basis of appropriate weightage assigned to performances of varying time periods. Additionally, so far, the ascent in the Indian market is broad-based, but mid and small caps have grown at a faster rate than the large caps. In terms of rotation, presently large caps might be favored. Consequently, selected schemes should belong to categories, that allow easy movement from one cap to another, and a few examples are Large+Midcap, Multicap, Flexicap, and Focus.