Equity Market Outlook

Indian equities experienced a decline after four months of consistently good returns due to relatively weak FPI inflows and rising US Treasury yields.

Investor mood was also affected by Fitch’s downgrading of US long-term debt from AAA to AA+, increased oil costs, weakening Chinese demand, and a weak monsoon.

Benchmark indices saw profit-taking in August after reaching all-time highs in July, and they spent the whole month in a sideways to negative range. The S&P BSE Sensex and NIFTY 50 both fell 2.5% at the month’s end.

The NIFTY Midcap 100 and NIFTY Small Cap 100, which increased 3.7% and 4.6%, respectively, continued to outperform their large-cap peers.

Market breadth remained strong with the advance/decline ratio up over the month while volatility was up compared to the previous month.

Domestic Market Indicies Performance:

If you look at the above table mid & small-caps have outperformed the large-cap peers in the last 3 months.

The pace of FPI inflows continued with net inflows for the month at Rs. 12,262 Cr.

The month saw large block trades across companies driven by the valuation premium as promoters and private equity took profits on long-term investments.

Adequate demand for many of these high-quality companies highlights the strength and depth of the Indian capital markets.

With a GDP print of 7.8% vs. 6.1% in the prior quarter, India kept its title as the fastest-growing country.

This was made possible by increased capital spending and the services sector. The RBI maintained rates on the policy front, noting mediocre monsoons and transitional inflation in the second half of the year.

Headline July inflation figures came in at 7.44% vs. 4.9% in June 2023. Core inflation held steady, at 5% in July v/s 5.2% in June.

The Q1FY24 results season came to a successful conclusion. Performance across the auto and finance sectors indicated that consumer demand was strong.

The auto industry benefited from lower raw material costs as well as robust demand throughout the run-up to the holiday season.

Similar findings were striking for state-run banks and smaller banks in their respective categories. The hospitality and travel industry also contributed to the upward trend in earnings.

Due to reduced realizations, greater prices, and restrictions on worldwide demand, the industries of IT, cement, chemicals, and metals encountered difficulties.

Going forward, the sharp outperformance of the mid and small-cap sectors and the rich valuations across sectors could cap gains.

The gains in the last few months have rendered valuations expensive v/s regional peers.

However, India’s strong macroeconomic position, improving profitability and volumes in the consumption sectors, and the resilient growth narrative are likely to limit downside.

The key drivers for markets in the next few months will be the festive season-led recovery and the state elections later this year.

Given the recent surge in market value, we suggest investors keep their portfolios diversified so that the risks associated with one asset class are offset by those associated with another.

Additionally, large, mid, and small caps all complement one another, and investors should retain their exposure to all of them and keep rebalancing over time rather than considering these categories as competitors.

What worked for Us: