Investment Quotient

Equities recovered in July; bond markets subdued over Fed rate hike

• Domestic equity markets recovered sharply in July on the back of lower commodity prices and recovery in corporate margins.
• Growth themed-stocks recovered rapidly in the last three months due to lower commodity prices, strong domestic demand and reasonable value post-correction.
• Equity market volatility is likely to continue for some more time before a more concrete direction emerges.
• In the near term, the factors that will move the market include oil and commodity prices, expectations of normal monsoon and the domestic demand
• Indian bond markets have factored in the peak policy rate now seen around 5.75%-6%.
• The IMF cut growth forecast for India by 80 basis points to 7.4% for 2022-23 and 6.1% for 2023-24.

Know about last month's market performance

Key Indices: Here’s a look at how the key indices, treasury yields and commodities performed for the month ended July 2022.

YTD is year to date (calendar year).

Equity Market Update

Equities showed resilience but still below Oct 2021 levels

• The Indian market performance showed resilience in the last month in which Nifty 50 recovered by 12% from the bottom (since17th June), and both Mid and Small-Cap indices recovered by 15%/11% over the same period.
• However, the Nifty is still trading below 7% from the top (since 18th Oct’21) and both Mid and Small-Cap indices are 10%/12% below the 18th Oct levels.
• In July 2022, FIIs were net buyer to the tune of Rs. 6567.71 Cr and DIIs were net buyers to the tune of Rs. 10,546.02 Cr & the domestic MFs bought Rs. 3,707.19 Cr worth of equity.

Debt Market Update

Bond markets were subdued in response to Fed rate hike

• G-sec yields drifted higher early in the month as markets began to price in a 100 bps Fed rate hike in Jul following stronger inflation and payrolls data. However, yields came off as Fed speakers discouraged this line of thought.
• Moves lower were offset by significant OMO sales by the RBI, though this downside sustained after the Fed indicated moderate pace of rate hikes after the Sep meeting.
• Indian markets have factored in the peak policy rate now seen around 5.75%-6%.

What to watch out for in coming months

• Jul’22 turned out to be a recovery month post a major selloff seen in Jun’22 on account of weaker global cues driven by higher inflation print in the US market. Cool-off was seen in the majority of the commodity prices which has brought confidence in the recovery and corporate margins.
• Majority of the emerging market countries have seen FII selling leading to weakness in the domestic market as well. The market is now watching the earnings season which stands critical in terms of upgrade/downgrade amidst elevated raw material prices. Moreover, the corporate commentaries on the demand dynamics going forward amidst the inflationary scenario would be a key monitorable.
• The Growth theme has outperformed all other styles by a notable margin in the last three/six months from the oversold zone. While Growth stocks had suffered the most in the recent correction, they recovered rapidly over the last three months thanks toa) A cool-off in commodity prices, b) Robust domestic demand, and c) Reasonable valuation post-correction. However, for a longer duration (1Yr and 2 Yr), the Value and Growth theme has been the most dominating theme in the market.
• The VIX currently stands at lower than LTA and a clear trend is likely to emerge only when the volatility stays at lower levels for a longer time period. However, we except volatility is likely to continue for some more time before it concludes in a more concrete direction.
• Macro will continue to drive near-term fundamentals. The key near-term factors that the market will watch out for are the direction of Oil and Commodity prices, expectations of normal and spatial distribution of monsoon and the domestic demand.
• The 10-year benchmark yield gradually came down during the month, from 7.45% to close at 7.32%, registering a drop of 12 bps. The 10-year bond yield slid to its lowest in over two months, tracking the drop in its U.S. counterpart, and on expectations that the RBI may not raise rates by 50 basis points in the upcoming policy.
• U.S. Treasury yields fell after data showed the economy contracted again in the second quarter, suggesting that the Federal Reserve may not need to be so aggressive to cool inflation.
• India CPI inflation slowed to 7.04% with a favourable base and slowing momentum. High tomato prices were offset by deceleration in other food items, and core inflation also eased to 6.4% (7.2% prev), in line with clothing (despite strong MoM gains on cotton prices) and miscellaneous inflation. Notably, the GOI excise duty cut on auto fuels was partly offset by higher taxi and air fares. FY23 inflation is expected to average around 6.7-6.8%% YoY with upside risks.
• The FOMC raised the policy rates by 75bps and confirmed the step-up in pace of Quantitative Tightening on expected lines as the FOMC maintained concerns about the elevated state of inflation and its stance of a soft-landing scenario. However, a key change was that the central bank confirmed that it will be moving to a data dependent stance while recession fears were also downplayed
• There was also guidance that the pace of tightening could moderate but that would remain contingent on the manner in which inflation pans out particularly service sector/core inflation. Given the data dependent guidance, investor focus will shift to the next two CPI prints; July and August in a run-up to the next meeting in September.
• The International Monetary Fund has cut the growth forecast for India by 80 basis points for current and next financial year to 7.4% and 6.1%, respectively, as per its July Update of its World Economic Outlook.
• The Fund also slashed its projection for global growth to 3.2% in 2022, 0.4 percentage points lower than the number it put out in the April 2022 WEO. It also trimmed its forecast of global growth next year to 2.9%, a cut of 70 basis points from the one it made in April.
• RBI governor speaking at Bank of Baroda Economic conference said, that the Indian Rupee is holding up well as compared to several developed economies and that the central bank has zero tolerance for wild swings in the forex market. RBI has been supplying US dollars to the market to ensure there is adequate liquidity. Currently, the forex reserves cover 95% of external debt, up from around 70% in FY13. Imports cover for reserves is at 10.5 months currently, much better than the seven months in FY13 but below the peak of 14.4 months in FY08. Further, the Rupee, which has lost 7.5% so far this year against the US dollar, is expected to settle at the 80 level by March.

Asset Class Returns

The table below shows asset class returns for various time periods.

* Benchmark for Debt –CRISIL Short Term Bond Fund Index, Equity- S&P BSE Sensex, Liquid- CRISIL Liquid Fund Index and Prices of Gold. The returns computed are as on 29th July 2022. Returns less than one year is absolute and more than one year is compounded annualised.