September 2022 Stock Market Outlook

The Sensex surged another ~3.5% in Aug’22 after experiencing a strong rebound of ~9% in the previous month. Mid and Small Caps outperformed Large Caps. Most major sectors, except IT, delivered positive returns with capital goods, consumer durables, auto, and banking is the best performing sectors.

FPIs turning back to India

India witnessed one of the highest FPI outflows among peer markets — Indonesia, Philippines, S. Korea, and Taiwan. However, after being net sellers for the last 11 months, FIIs bought equities in the cash market worth approx. Rs. 22k cr. DIIs were net sellers for the first time in the last 17 months, selling equities worth approx. Rs. 7k cr.

Markets moving above Nifty @ MRP

At the time of writing this, Nifty 50 currently trades ~14% above its fair value, while there are pockets of extreme overvaluation and undervaluation. Nifty though is a highly concentrated portfolio dominated by the top 10 companies, hence it is not the case for all the stocks. Selected investment opportunities still persist in the market.

Fed turns hawkish, stirs global markets

Jerome Powell, in his speech at the Jackson Hole Symposium, delivered a strong message saying that the US Fed will likely impose large interest rate hikes in the coming months and is focusing on taming the highest inflation in four decades.

Stock markets which went by the early statements of the Fed which seemed dovish in nature factored that the rate cut could happen as early as 2023. After which the markets started rising approaching their previous highs. However, the latest statement from the speech suggests, that may not be the case, and tackling inflation would be the priority at the cost of easing credit.

India’s GDP growth back on track in Q1FY23

Real GDP grew at a healthy pace of 13.5% YoY, primarily due to the lower base of Q1FY22 due to the 2nd wave of Covid. An increase in private consumption was witnessed on the back of normalisation of demand. Manufacturing PMI remained flat whereas there was an increase in Services PMI. GST collections in Aug’22 were Rs. 1.44 lakh cr, up 28% YoY.

Retail inflation cools off but is still at higher levels

CPI decreased by 30 bps in July’22 due to lower food inflation. Higher LPG, kerosene, and coal prices led to an increase in fuel inflation. While CPI has been above 6% in 2022, the easing in international agriculture and industrial commodities along with softening in oil prices should result in softening of inflation in the months ahead.

Monsoon in India has been above average, with cumulative rainfall higher by 6% over its long-term average. However, the rainfall has been distributed unevenly. Rainfall was in excess in southern and central India, while much weaker in north-west, east, and north-east India. This can have an impact on food prices. However, for the past 3 years, India has seen a good monsoon in a majority of its parts. Also, the food stock is at sufficient levels. Hence, we do not see any major concern on that front.

Valuations are reasonable

Indian markets are trading at a premium to its emerging market peers. The current valuation is slightly elevated in comparison to the long-term multiples. However, we are confident about the economy over the next 5 years. Even if we purchase shares at slightly higher prices, there is a good chance of earning healthy returns over the next 5 years. The Indian corporate sector is in the best position to gain pricing power and balance sheet strength. The majority of the sectors have seen consolidation. We are seeing this across sectors: Power, Telecom, Cement, Banks, NBFCs, Real Estate, building materials, Paper, pharma, capital goods, consumer durables, etc. This will give strong profitability for incumbents due to the high barrier to entry for the next few years.

Wait & watch as of now, despite of correction in the US

The US S&P500 has roughly 15% (re-check this number) from its peak. We have been warning our investors about the overvaluation in the US market and had advised them to reduce their positions. Despite of correction, we would still seek some clarity on the growth and controlled inflation before we consider adding a position in US markets.

The interest rates are expected to rise as Fed has hinted at tightening financial conditions to put an end to the 40-year high inflation in the US. Financial conditions have comparatively tightened off late yet very easily compared to the historical perspective.

Global investment firms are lowering their estimates for real GDP growth for China to 3.8% from 4.3% for 2022 and to 5.0% from 5.4% for 2023, due to longer-than-expected lockdowns and a worse-than-expected housing market correction.

Cooling down of the war between Russia & Ukraine is another factor to be monitored that can decide the further course of global markets.

How are we looking at this?

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