It took 18 months for the Nifty50 & Sensex to break into lifetime highs after struggling around the 18,600-18,800 region for an extended period.
During the course of these 18 months, the markets have had to digest the volatility on accounts of the Ukraine-Russia war, over $40 billion of FII selling, the fastest interest rates hike by global central banks and concerns about India’s valuation amongst developed and emerging economies.
After digesting all of the above, the markets have scaled new lifetime highs and are poised for some more in the coming few months. However, certain points need to be watched to play out the next 6-12 months considering we approach the 2024 general elections in April–May of next year.
Sector rotation
Unlike the US markets, which have been dominated by the large 10 companies contributing significantly to the gains, the rally from 16,800 on Nifty in March till 19,000 in June was dominated by more mid and small caps in comparison to large caps.
Indeed, HDFC twins, RIL and many other large contributors to the Nifty have underperformed the broader market. With some of the large cap names still available at decent valuations — the next leg of the rally could start in the large cap names and profit booking may emerge in the small and mid-cap segments.
Frothy valuations across some segments may see profit-booking around the quarterly results if they do not come up as per expectations. Pharma and banking could continue to see some inflows.
Commodities
The market rally has also been fuelled by softer commodity prices across all segments, leading to margin expansion in many companies. The supply shocks of Covid and the Ukraine-Russia war seem to be past history.
With China coming back on stream in 2023, we are seeing deflationary pressure across goods — leading to increased tailwinds for many consuming / consumer-focussed sectors. The current trend of lower commodity prices may continue for some time as the economic recovery and stimulus package seems uneven.
Also, record high interest rates across the western economies are forcing clampdown on discretionary spending — lowering demand projection.
However, two commodities — oil and copper — should see some more volatility due to the geopolitical situation for the former and the worldwide drive to cleaner energy for the latter. Copper’s global balance sheet can get tighter later this year. In the Indian context, the government has taken proactive steps to rein in prices of agri-commodities as well as support farmers with higher MSPs.
However, with the delayed monsoon and threat of La Nina, there are genuine concerns about the Kharif crop output and the resultant impact on the rural demand for the year.
Global liquidity & interest rates
The US hiked interest rates from 0.25% to 5.25% in a short span of 1 year from 2022 to 2023. This unprecedented rate hike, along with the QT, was supposed to rein in inflation and unwind the Covid-era monetary stimulus. However, the collapse of SVB and other regional banks forced the FED to take a U-turn and pump in more money to support the banks and financial markets in March-April of 2023.
Although the US markets bottomed out in October 2022, the real rally has happened in global markets post March due to the easier liquidity norms and expectations of no further rate hike.
A stubborn labour market or persistent inflation reading could change the perception of no rate hikes and could result in Fed fund rates being closer to 6%— a number that is bound to create volatility in equity markets. Further, tightening could also lead to depreciation in emerging market currencies. Many of these events will play out in the July – August period, so investors need to pay close attention to these macro events.
Technical indicators & momentum
The current momentum should take the Nifty around 19,500 levels. The large cap names like HDFC Bank, RIL, SBI could take leadership in this market. For investors, it would be a good time to start looking at large cap names where there is good earnings growth and can justify the current valuations.
Quarterly numbers for Q1FY24 would set the tone for further upside if there are not many concerns on volume expansion.
The renewed interest of FPIs in India could continue as it enjoys a comfortable macro environment along with corporate earnings. FDI and FII flows could get stronger ahead of the elections.
Be invested!
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