KEY EVENTS
Indian markets scaled to new all time highs in Aug, 2021 and there was mild shakeout in Smallcap & Midcap segments in the middle of August & in the last of week of August, they have staged upside reversal. Overall, Mid & Smallcap segments underperformed largecap indices in August, 2021 due to profit booking at their higher levels after rallying tremendously in past 16 months. Following are Aug, 2021 performance of the indices. Largecap indices are continued to climb the wall of worry.
| Index |
MoM Change % |
| SENSEX |
9.4% |
| NIFTY 50 |
8.7% |
| NIFTY MIDCAP 100 |
2.2% |
| NIFTY SMALLCAP 100 |
-2.5% |
| NIFTY 500 |
6.5% |
Following are performance details of NIFTY 50, NIFTY MIDCAP 100, NIFTY SMALLCAP 100 for 1 year, 3 year, 5 year, 10 year as on 31-Aug-2021.
Inflation: India’s retail price inflation rate eased to 5.59% YoY in July, 2021 from 6.26% in previous year. Food inflation slowed from 5.15% to 3.96% and Fuel, electricity also slowed in July, 2021. Meanwhile, prices of clothing, housing, footwear are picked up in July, 2021.
Brent crude prices corrected by 7% in Aug, 2021 from $77.72 per barrel to $72.26 per barrel at the end of Aug, 2021.
Indian currency appreciated by 1.86% in Aug, 2021 and rupee settled at $72.94 per USD at 31-Aug-2021. Rupee’s appreciation is due to dollar inflows, absence of RBI’s action intervention in spot market, dovish comments by FED chief.
FII Inflows: FIIs turned net-buyers with regard to Indian equities in Aug, 21 to the tune of ₹2085 Cr and meanwhile, DIIs have bought ₹6895 Cr of Indian equities.
About India’s Q1FY22 GDP: India’s GDP at Constant (2011-12) prices in Q1 of 2021-22 is estimated at ₹32.38 lakh crore, as against ₹26.95 lakh crore in Q1 of 2020-21, showing a growth of 20.1% as compared to contraction of 24.4% in Q1 2020-21. This strong rebound is due to lower base in previous year. Despite the severe second wave of Covid. Our consumption remains intact and agriculture, exports shown growth. Manufacturing has also picked up in Q1FY22.
About US FED’s Current Stance: US FED Chairman Mr. Powell communicated about tapering and interest rate hike during his address in Jackson hole symposium. According to his speech, FED may start reducing 'bond purchasing program (tapering / reducing liquidity in the system)' prior to this year end. However, interest rate hike will take some more time. As per his speech, there is clear distinction between 'tapering' as well as 'rate hike'. There will be enough communication from FED about both to prepare the financial markets in advance and 'tapering is expected to happen after enough indication and not a sudden event as happened in year 2013 along with rate hikes'. Now, rate hikes are expected after year 2022 end.
Market Outlook
DEBT
The 10-year benchmark yield settled at 6.215% at 31st Aug-2021 against 6.20% on 31st July-2021.
During bi-monthly MPC meeting, It decided to continue the accommodative stance and kept the rates unchanged.
Due to RBI’s various actions i.e GSAP, OMOs, OT etc, there is substantial liquidity in the system. RBI has injected net liquidity of ₹2.4 trillion through open market operations in FY2022.
As of now, the general consensus are that the interest rates are expected to remain at current levels with continuation of accommodative stance to support the growth for near future.
CPI inflation is expected to normalize between 5%-5.75% in FY22 according to RBI & expected GDP growth for FY22 is 9.50% as per RBI.
RBI Governor has also recently mentioned that 'hasty withdrawal of easy policy can undo the gains'. It further emphasises that the interest rate will continue to be at current levels minimum for near future.
Overall, globally interest rates seems to have bottomed out and there are very less probability for further downside of interest rate. Hence, in medium to long term, reversal of interest rates are more likely however, nobody will be able to predict when it will happen. Due to this, the returns from debt as a asset class is quite low and it requires more time to get bit higher return from debt as a asset class.
Credit risk funds, Medium & Long term corporate bond funds are riskier, as there are chances of default which will cause capital loss or depreciation. Previous rating downgrades and subsequent default of interest payment as well as deferment of repayment by ILFS, Zee/Essel group, DHFL, YES bank, Lakshmi Vilas Bank (perpetual bonds) reiterates the same and we suggest our clients to stay away from investing in these debt funds.
Market Outlook
GOLD
Gold was being in downtrend from Aug, 2020 to March, 2021 after its 10-12 months of steady uptrend, Gold prices have been started rebounded from April, 2021 onwards. Gold prices made a recent bottom in March, 2021 @ $1687 per ounce and As of Aug, 2021, it has rebounded by 7.49% & settled at $1813 per ounce in 31-Aug-2021.
Gold went through mild correction in mid of August and later recovered and ended the month with flat performance.
In past three months, there are positive news flows which supports the gold price movement and following are few of them.
As per JP Morgan on 19-May-2021, 'Big institutional investors are dumping Bitcoin and going back into Gold'
Russia does now intend to do fresh Gold buying through its Sovereign Wealth Fund along with Euro, Yen and intends to reduce its dollar reserves.
Uptick in demand and current lower prices to support gold in upcoming festive season.
Price movement of gold is sensitive to geo-political events, uncertain economic growth etc.
Along with this, Dwindling gold supply and fall in new gold discoveries will drive the prices over the long periods. The larger trend of USD depreciation will stabilize the Gold price with appreciation bias.
There should be allocation to gold in the portfolio to the extent of 5%-10%.
Market Outlook
EQUITY (Sectoral Performance)
In August, 2021 – IT Sector continued its dominance and NIFTY IT index was up 13% MoM led by heavyweights TCS, Infosys, Tech Mahindra.
FMCG sector came out of its 16 months consolidation in August, 2021 and NIFTY FMCG index was up by 9% MoM led by Nestle, HUL.. FMCG sector now emerged new leader in ongoing bull market and we need to wait and see whether its just one month movement or there are legs for sustainability. During mild correction in broader market in mid of August also led the fund flows to the safety which is prevalence in FMCG sector.
Private banks (HDFC Bank & ICICI Bank), Financial services sector (Bajaj Finance, Bajaj Finserv, HDFC Ltd) have made reasonable gains in August, 2021.
Metals and Mining went through minor correction in August, 2021.
Midcap and Small cap IT (along with ER&D stocks) & Select Midcap Pharma, Specialty chemicals stocks continued its strength throughout the month and they predominantly consolidated their gains.
Autos & Auto-ancillary are another sector facing headwinds due to hike in commodity prices along with semi-conductor chip shortages globally. Two wheeler segments further get disrupted due to emergence of EV scooters. Despite the upcoming demand revival during festive season, auto OEMs are struggling to pile up the stocks due to chip shortage.
Due to headwinds of pricing pressure, US focused generic pharma companies posted poor results in Q1FY22 and there was a meaningful correction in generic pharma companies.
Following are YTD performance of various sectors.
Valuations
As per Market cap to GDP basis, Indian markets are 104% of GDP and it is higher than historical average 75% of GDP.However, it is still way below the global averages i.e. US markets are currently trading around 2X times of its GDP.
As per price to book basis, current markets are trading at 3.15X of book value on 1 year forward basis (as per consensus estimates & Motilal Oswal). It is higher than the historical average of 2.6X.
As per price to earnings basis, current markets are trading at 19.9X of 1 year forward earnings and it is higher than historical average of 18.0X.
Overall, due to the sharp rebound in the markets and the availability of massive liquidity, valuations are stretched in the short term.
Q2, Q3, Q4 of FY21 earnings were above the analyst estimates. Q1FY22 turned to be bit mixed bag since some of the segments of markets disrupted due to second wave of Covid-19 in Q1FY22. However, low base of Q1FY21 played a major role in Q1FY22 earnings.
According to the management commentaries of various industries, raise in raw material prices along with huge spike in logistics costs impacted the margins at EBITDA levels. Export focused industries margins bit softened in Q1FY22 and needs to be carefully watched in upcoming quarters. however, the same spike in logistics cost played an another important role of reduction in imports (dumping of cheap goods in India) across the sectors and it supported the domestic manufacturing to the large extent.
The tailwinds of China+1 strategy, lower interest rate, lower tax rates, deleveraged balance sheets of Indian corporates, commodity cycle due to supply glut, emergence of private CapEx are playing out fully now. The ongoing vaccination drive should support further revival of travel and hospitality sector which will revive the demand throughout the country.
With regard to IT Sector since it is current darling of the market, the attrition levels and employee cost are key monitorable. Since the IT sector turns to be a high growth sector now due to the theme of digitalisation, there is dearth of talent with niche skillsets and it eventually increases the employee cost. The raise in income levels in IT sector is expected to be a major booster for the economy since the same turns into consumption and should strengthen the revival of Real estate sector especially in and around IT hubs of south India.
As of now, the unanswered questions are that whether the demand in the economy is due to pent-up or structural. If the demand trend is structural, it should show up in upcoming few quarters results.
With regard to global liquidity, the US FED chairman’s comments are mentioned above and Tapering may start before end of year 2021 and interest rate hike is going to be after year 2022 only.
Outlook
It is impossible to time the short term market levels.
Volatility is expected to continue and downside risk is getting more in select pockets of the markets due to stretched valuation. In case of any short term fund requirement, current levels of the market provides THE BEST opportunity to book profits. However, in case of long term – remain invested during the volatile markets is the best solution to create the wealth.
Corrections occur every year in the market(SENSEX) due to various reasons and thereafter, it rebounds strongly. The below chart depicts the historical corrections happened in SENSEX every year at some point of time.According to this, 10%-20% of corrections are always possible.However, the investors who remain invested without panic during such tough phases have generated wealth over the long period.
We suggest you to remain invested, continue your SIPs & STPs as it is.In case of any correction, we will do the lump-sum switches to the targeted funds. As mentioned above, it is also time to create a cash IF THERE IS PERSONAL NEED.
Source: NSE | BSE | RBI | PIB | Bloomberg Quint | Research Reports of Dolat Capital | Prabhudas liladhar | ICICI PRU MF | Kotak MF
KEY EVENTS
Indian markets scaled to new all time highs in Aug, 2021 and There was mild shakeout in Smallcap & Midcap segments in the middle of August & In the last of week of August, they have staged upside reversal. Overall, Mid & Smallcap segments underperformed largecap indices in August, 2021 due to profit booking at their higher levels after rallying tremendously in past 16 months. Following are Aug, 2021 performance of the indices. Largecap indices are continued to climb the wall of worry.
| Index |
MoM Change % |
| SENSEX |
9.4% |
| NIFTY 50 |
8.7% |
| NIFTY MIDCAP 100 |
2.2% |
| NIFTY SMALLCAP 100 |
-2.5% |
| NIFTY 500 |
6.5% |
Following are performance details of NIFTY 50, NIFTY MIDCAP 100, NIFTY SMALLCAP 100 for 1 year, 3 year, 5 year, 10 year as on 31-Aug-2021.
Inflation: India’s retail price inflation rate eased to 5.59% YoY in July, 2021 from 6.26% in previous year. Food inflation slowed from 5.15% to 3.96% and Fuel, electricity also slowed in July, 2021. Meanwhile, prices of clothing, housing, footwear are picked up in July, 2021.
Brent crude prices corrected by 7% in Aug, 2021 from $77.72 per barrel to $72.26 per barrel at the end of Aug, 2021.
Indian currency appreciated by 1.86% in Aug, 2021 and rupee settled at $72.94 per USD at 31-Aug-2021. Rupee’s appreciation is due to dollar inflows, absence of RBI’s action intervention in spot market, dovish comments by FED chief.
FII Inflows: FIIs turned net-buyers with regard to Indian equities in Aug, 21 to the tune of ₹2085 Cr and meanwhile, DIIs have bought ₹6895 Cr of Indian equities.
About India’s Q1FY22 GDP: India’s GDP at Constant (2011-12) prices in Q1 of 2021-22 is estimated at ₹32.38 lakh crore, as against ₹26.95 lakh crore in Q1 of 2020-21, showing a growth of 20.1% as compared to contraction of 24.4% in Q1 2020-21. This strong rebound is due to lower base in previous year. Despite the severe second wave of Covid. Our consumption remains intact and agriculture, exports shown growth. Manufacturing has also picked up in Q1FY22.
About US FED’s Current Stance: US FED Chairman Mr. Powell communicated about tapering and interest rate hike during his address in Jackson hole symposium. According to his speech, FED may start reducing 'bond purchasing program (tapering / reducing liquidity in the system)' prior to this year end. However, interest rate hike will take some more time. As per his speech, there is clear distinction between 'tapering' as well as 'rate hike'. There will be enough communication from FED about both to prepare the financial markets in advance and 'tapering is expected to happen after enough indication and not a sudden event as happened in year 2013 along with rate hikes'. Now, rate hikes are expected after year 2022 end.
Market Outlook
DEBT
The 10-year benchmark yield settled at 6.215% at 31st Aug-2021 against 6.20% on 31st July-2021.
During bi-monthly MPC meeting, It decided to continue the accommodative stance and kept the rates unchanged.
Due to RBI’s various actions i.e GSAP, OMOs, OT etc, there is substantial liquidity in the system. RBI has injected net liquidity of ₹2.4 trillion through open market operations in FY2022.
As of now, the general consensus are that the interest rates are expected to remain at current levels with continuation of accommodative stance to support the growth for near future.
CPI inflation is expected to normalize between 5%-5.75% in FY22 according to RBI & expected GDP growth for FY22 is 9.50% as per RBI.
RBI Governor has also recently mentioned that 'hasty withdrawal of easy policy can undo the gains'. It further emphasises that the interest rate will continue to be at current levels minimum for near future.
Overall, globally interest rates seems to have bottomed out and there are very less probability for further downside of interest rate. Hence, in medium to long term, reversal of interest rates are more likely however, nobody will be able to predict when it will happen. Due to this, the returns from debt as a asset class is quite low and it requires more time to get bit higher return from debt as a asset class.
Credit risk funds, Medium & Long term corporate bond funds are riskier, as there are chances of default which will cause capital loss or depreciation. Previous rating downgrades and subsequent default of interest payment as well as deferment of repayment by ILFS, Zee/Essel group, DHFL, YES bank, Lakshmi Vilas Bank (perpetual bonds) reiterates the same and we suggest our clients to stay away from investing in these debt funds.
Market Outlook
GOLD
Gold was being in downtrend from Aug, 2020 to March, 2021 after its 10-12 months of steady uptrend, Gold prices have been started rebounded from April, 2021 onwards. Gold prices made a recent bottom in March, 2021 @ $1687 per ounce and As of Aug, 2021, it has rebounded by 7.49% & settled at $1813 per ounce in 31-Aug-2021.
Gold went through mild correction in mid of August and later recovered and ended the month with flat performance.
In past three months, there are positive news flows which supports the gold price movement and following are few of them.
As per JP Morgan on 19-May-2021, 'Big institutional investors are dumping Bitcoin and going back into Gold'
Russia does now intend to do fresh Gold buying through its Sovereign Wealth Fund along with Euro, Yen and intends to reduce its dollar reserves.
Uptick in demand and current lower prices to support gold in upcoming festive season.
Price movement of gold is sensitive to geo-political events, uncertain economic growth etc.
Along with this, Dwindling gold supply and fall in new gold discoveries will drive the prices over the long periods. The larger trend of USD depreciation will stabilize the Gold price with appreciation bias.
There should be allocation to gold in the portfolio to the extent of 5%-10%.
Market Outlook
EQUITY (Sectoral Performance)
In August, 2021 – IT Sector continued its dominance and NIFTY IT index was up 13% MoM led by heavyweights TCS, Infosys, Tech Mahindra.
FMCG sector came out of its 16 months consolidation in August, 2021 and NIFTY FMCG index was up by 9% MoM led by Nestle, HUL.. FMCG sector now emerged new leader in ongoing bull market and we need to wait and see whether its just one month movement or there are legs for sustainability. During mild correction in broader market in mid of August also led the fund flows to the safety which is prevalence in FMCG sector.
Private banks (HDFC Bank & ICICI Bank), Financial services sector (Bajaj Finance, Bajaj Finserv, HDFC Ltd) have made reasonable gains in August, 2021.
Metals and Mining went through minor correction in August, 2021.
Midcap and Small cap IT (along with ER&D stocks) & Select Midcap Pharma, Specialty chemicals stocks continued its strength throughout the month and they predominantly consolidated their gains.
Autos & Auto-ancillary are another sector facing headwinds due to hike in commodity prices along with semi-conductor chip shortages globally. Two wheeler segments further get disrupted due to emergence of EV scooters. Despite the upcoming demand revival during festive season, auto OEMs are struggling to pile up the stocks due to chip shortage.
Due to headwinds of pricing pressure, US focused generic pharma companies posted poor results in Q1FY22 and there was a meaningful correction in generic pharma companies.
Following are YTD performance of various sectors.
Valuations
As per Market cap to GDP basis, Indian markets are 104% of GDP and it is higher than historical average 75% of GDP.However, it is still way below the global averages i.e. US markets are currently trading around 2X times of its GDP.
As per price to book basis, current markets are trading at 3.15X of book value on 1 year forward basis (as per consensus estimates & Motilal Oswal). It is higher than the historical average of 2.6X.
As per price to earnings basis, current markets are trading at 19.9X of 1 year forward earnings and it is higher than historical average of 18.0X.
Overall, due to the sharp rebound in the markets and the availability of massive liquidity, valuations are stretched in the short term.
Q2, Q3, Q4 of FY21 earnings were above the analyst estimates. Q1FY22 turned to be bit mixed bag since some of the segments of markets disrupted due to second wave of Covid-19 in Q1FY22. However, low base of Q1FY21 played a major role in Q1FY22 earnings.
According to the management commentaries of various industries, raise in raw material prices along with huge spike in logistics costs impacted the margins at EBITDA levels. Export focused industries margins bit softened in Q1FY22 and needs to be carefully watched in upcoming quarters. however, the same spike in logistics cost played an another important role of reduction in imports (dumping of cheap goods in India) across the sectors and it supported the domestic manufacturing to the large extent.
The tailwinds of China+1 strategy, lower interest rate, lower tax rates, deleveraged balance sheets of Indian corporates, commodity cycle due to supply glut, emergence of private CapEx are playing out fully now. The ongoing vaccination drive should support further revival of travel and hospitality sector which will revive the demand throughout the country.
With regard to IT Sector since it is current darling of the market, the attrition levels and employee cost are key monitorable. Since the IT sector turns to be a high growth sector now due to the theme of digitalisation, there is dearth of talent with niche skillsets and it eventually increases the employee cost. The raise in income levels in IT sector is expected to be a major booster for the economy since the same turns into consumption and should strengthen the revival of Real estate sector especially in and around IT hubs of south India.
As of now, the unanswered questions are that whether the demand in the economy is due to pent-up or structural. If the demand trend is structural, it should show up in upcoming few quarters results.
With regard to global liquidity, the US FED chairman’s comments are mentioned above and Tapering may start before end of year 2021 and interest rate hike is going to be after year 2022 only.
Outlook
It is impossible to time the short term market levels.
Volatility is expected to continue and downside risk is getting more in select pockets of the markets due to stretched valuation. In case of any short term fund requirement, current levels of the market provides THE BEST opportunity to book profits. However, in case of long term – remain invested during the volatile markets is the best solution to create the wealth.
Corrections occur every year in the market(SENSEX) due to various reasons and thereafter, it rebounds strongly. The below chart depicts the historical corrections happened in SENSEX every year at some point of time.According to this, 10%-20% of corrections are always possible.However, the investors who remain invested without panic during such tough phases have generated wealth over the long period.
We suggest you to remain invested, continue your SIPs & STPs as it is.In case of any correction, we will do the lump-sum switches to the targeted funds. As mentioned above, it is also time to create a cash IF THERE IS PERSONAL NEED.
Source: NSE | BSE | RBI | PIB | Bloomberg Quint | Research Reports of Dolat Capital | Prabhudas liladhar | ICICI PRU MF | Kotak MF
