Monthly Market Roundup: Sep '21

Update on US FED

• Tapering (reducing liquidity) will start soon (but there is no timeline as of now)
• Interest rates in US is expected to raise in mid of year 2022 itself instead of earlier perceived year 2023

Risks for Current Markets levels

• Tapering
• Logistics Cost and Spike in Raw material cost for all export & consumption oriented sectors
• Attrition and Raise in employee cost for IT Sector
• Delay in Privatization for PSUs, Delay in CapEx execution, Delay in credit growth revival

What to do now @ 60000 SENSEX

• Short Term – Best time to book profits for short term cash requirements
• Long Term – Stay invested and continue SIPs & STPs

• The 10 year benchmark yield settled at 6.223% on 30-Sept-2021 against 6.215% in 31-Aug-2021.
• With regard to Govt. Finances (fiscal deficit), currently fiscal deficit for 1-April to 31st Aug-2021 period is, 31% of base estimates and it is significantly lower and it improves scope for Govt to accelerate spending towards Infra. Due to record high tax collection, Government sticks to its original borrowing program and Planned CapEX towards Infrastructure are also intact. This is positive for bond markets.
• The surplus liquidity in the banking systems stands at ₹7 trillion. RBI intends to maintain the surplus liquidity through various tools available under its purview.
• With regard to inflation, it cooled off and being within RBI’s target for past couple of months. However, it is expected to spike in coming months due to raise in oil prices. 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.

• 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.
• We reiterate our suggestion to all our investors to stay away from long term bond funds, credit risk funds due to both interest rate risk as well as credit risk.

• In Sept, 2021 – The new sectoral leaders emerged strongly and they are Realty, Energy and Media. There was rebound visible in Autos as well as Banks. IT and Pharma was flat meanwhile, Metals corrected MoM.
• Rebound in energy sector is attributed to Coal India as well as NTPC both went up more than 20% along with ONGC in Sept, 2021.
• The performance of Media is solely due to the spike in prices of Zee entertainment and it is basically due to a news about merger of Zee with Sony.

• Post emergence of Evergrande issue in China, there was sharp reversal in steel stocks due to expected weak demand from China. However, non-ferrous stocks in Aluminum, NALCO continued their uptrend.
• Following are YTD performance of sectoral indices with major NIFTY indices.

Tapering - US Fed announced that Tapering (reduction in bond purchase) will start soon however, there is no tentative time line. There is also a view from FED chief that interest hike may be preponed in mid of year 2022 instead of year 2023.

Energy Crisis & Hike in Oil & Gas prices- There is heavy shortage of natural gas in Europe and around the world and China has also cut its production and started to import natural gas. Due to this shortage, European gas prices surged by almost 500% in past year. The storage of Natural gas in Europe as well as China are historical low levels. The upcoming winter is expected to deepen this crisis since Eruope had shut its Coal based plats already.

Slowdown in China - There seems a slowdown in China emanating from Govt action on shutting down steel plants, chemical plants due to environmental issues etc. There is massive power shortage in China and many provinces in China have raised the power prices by 25%. All these issues cause the slowdown in China’s economy.

Evergrande – The largest property developer in China Evergrande is trying to manage its massive debt which is estimated to be around $305 billion and it could spark broader risks to China’s financial system if not stabilized. However, Evergrande’s debt is predominantly within China and global banks does not have much exposure. There are already many headlines which compares Evergrade with Lehman moment in 2008 however, it does not look on that direction as of now.

US Bond Yields – Due to the above all issues, USD strengthened and it caused the spike in US bond yields or vice versa.

• However, when there is so many uncertain events happening around globe, usually there would be risk-off trade in Indian equities and Usually, money will flow out of asset heavy and cyclical businesses to the perceived safe pockets of markets i.e FMCG, IT, Pharma etc. However, the outperforming sector during this period are asset heavy and leveraged businesses in Power, Energy, Infrastructure, PSUs etc.
• Meanwhile, the broader markets (Mid & Small) continued its dominance in Sept, 2021.
• This behavior of Indian equities seems contradictory and it looks like that market rewards the undervalued segments of market with an anticipated CapEX led recovery in economy. The Privatization of Air India and Power sector reforms would enable and strengthen this dominance in price performance of these Asset heavy businesses. It is interesting to note that these sectors have been once written off due to ESG concerns etc however, now market recognize and rewards due to its essentiality especially in Power and Mining segment.

• As per Market cap to GDP basis, Indian markets are 123% of GDP (on trailing basis) 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 2.2X times of its GDP.
• As per price to book basis, current markets are trading at 3.6X of book value on 12 months trailing basis and It is higher than the historical average of 2.9X.
• As per price to earnings basis, current markets are trading at 27.6X of 12 months trailing earnings and it is higher than historical average of 19.5X.

• Following are consensus estimates of NIFTY earnings for next two years. According to this, current markets are trading at 26X of FY22 earnings and 22X of FY23 earnings.
• Overall, due to the sharp rebound in the markets and the availability of massive liquidity, valuations are definitely stretched in the short term.
• After witnessing more positives in past 4 quarters, now we are entering into earnings season of Q2FY22. As per the sharp rally in markets in past couple of months, Markets seems to have discounted the good earnings season however, let us gear up towards original numbers.

• The risk for earnings for important constituents of the markets are as follows,
  1. IT Sector – Attrition rate, high employee cost, Lower than expected deal wins
  2. Auto – Low production due to chip shortage, Disruption due to EV, High Raw material cost,
  3. Banking – Delayed revival of credit growth,
  4. Chemicals – Delayed execution of CapEx, Lower than expected growth
  5. All export oriented sectors / stocks – Higher logistics cost,
  6. PSUs – Delay in Privatisation,
  7. Pharma – US FDA Inspection (If any observation on manufacturing facilities), Pricing in US Generic market,
  8. Metals – Reversal in commodity prices due to less demand (however, demand is strong right now). ole in Q1FY22 earnings.

• Following tailwinds 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.
  1. China+1 strategy,
  2. lower interest rate, lower tax rates, deleveraged balance sheets of Indian corporates,
  3. Commodity cycle due to supply glut,
  4. Emergence of private CapEx,
  5. Strong Infra spending from Government
  6. Higher earnings & salary hike for individual and the same led to revival in Real estate sector as a whole