Markets continued their upward trajectory in July and ended the month at an all-time high. The Nifty50 index ended the month with a 3.9% return while the NSE Mid Cap 100 and NSE Small Cap 100 indices generated returns of 5.8% and 4.5% respectively. During July, the indices for Pharma, Auto and Information Technology sectors outperformed the broader market, while the indices for Realty and Banks underperformed. During the month, the NDA government delivered its first Union Budget for its third term where they laid focus on increasing employment, addressing regional aspirations of its coalition partners and enhancing fiscal consolidation. The budget did minor tinkering on tax rates for individuals, capital gains taxes were rationalized across asset classes and new incentives were announced for employment generation and skill development while also targeting the fiscal deficit at 4.9% for FY25.
Other key developments for the month included the capital market regulator SEBI proposing tighter regulatory norms for the equity derivatives segment and the US FED keeping key interest rates unchanged, but signalling a rate cut as soon as September. The result season for Q1-FY25 has been mixed so far with companies in the Financials and Auto sectors reporting in-line or better than expected earnings, and companies in Metals & Mining sector, Cement and Speciality Chemicals reporting earnings' miss. On the macroeconomic front, WPI inflation in June increased to 3.4% from 2.6% in May, and IIP growth in May was at 5.9% compared to 5.0% in April. Foreign Portfolio Investors (FPIs) turned buyers for the second consecutive month to the tune of USD 3.3 bn in July, while Domestic Institutional Investors (DIIs) remained net buyers to the tune of USD 2.8 bn. FPI inflows into Indian equities stood at USD 3.7 bn in CY24-YTD vs. inflows of USD 21.4 bn in CY23. DII inflows into equities in CY24-YTD continue to be strong at USD 31.3 bn vs. USD 22.3 bn in CY23. In other global developments, on July 31st, the Bank of Japan delivered a very hawkish monetary policy by raising benchmark interest rates to 25 basis points and systematically cutting it's bond buying programme into half over the next two years. This resulted in a sharp appreciation in the Japanese Yen and is also likely to result in unwinding of the Yen carry trade over the near term.
Going forward
In the short term, we expect some events could have an impact on markets in general. These include regional conflicts and their resolution/continuation, interest rate actions by central banks and Yen carry trade unwinding. Strong re-rating in markets in the last one year may imply that we have borrowed some returns from the future. We find pockets of over valuation and exuberance especially in certain lower market capitalization segments which are already factoring a good amount of earnings growth along with lofty valuations, where, if earnings do not materialize then there is possibility of earnings cut as well as multiple de-rating. We believe that, currently, large caps are relatively reasonably valued vis-à-vis mid and small caps. However, we also believe that in the long-term, all segments offer good growth opportunities due to sustainable intrinsic value growth driven by superior economic growth in India. Earnings growth should be the key driver of returns hereon, and companies that can sustainably deliver it without taking too much balance sheet risk and redeploy capital in a prudent manner should outperform those which are unable to deliver the same. It is also important that we do not get carried away in the euphoria and not overpay for fleeting growth. |
