The Nifty index ended the June month on a positive note as it closed at ‘19,189’ as compared to May end ‘18,499’, an increase of 3.7%. Similarly, Sensex ended the June month at 64,718 with a positive return of 3.4%.
Indian equity benchmarks ended the passing week at record closing levels with frontline gauges settling above their crucial 64,700 (Sensex) and 19,150 (Nifty) levels, as robust foreign fund inflows and the advance of the southwest monsoon boosted investors’ sentiment. Key indices made a quiet start to the holiday truncated week as traders remain concerned about the Reserve Bank of India’s (RBI) statement that inflation is slowing down personal consumption expenditure, which in turn is moderating corporate sales and holding back private investment in capacity creation. However, sentiments turned optimistic on the very next day after the Department of Expenditure, Ministry of Finance, Government of India, approved capital investment proposals of Rs. 56,415 crores in 16 States in the current financial year. Sentiments remained jubilant after RBI in its latest data showing that India’s current account deficit (CAD) narrowed to $1.3 billion or 0.2 percent of GDP in the January-March quarter of FY23, mainly due to moderation in the trade deficit and a robust increase in services exports. Sentiments remained upbeat with UK Minister for Investment Lord Dominic Johnson stating that an India-UK free trade agreement (FTA) is important for both nations and it is for businesses on both sides to help drive that agenda. Traders overlooked Reserve Bank of India’s data showing that net profit of the manufacturing, and the IT sector moderated in 2022-23. The net profit margin of the manufacturing sector declined to 8.7 per cent in 2022-23, against 10.6 per cent in 2021-22. Markets enlarged gains on final day of the week as sentiments got boost with Reserve Bank Governor Shaktikanta Das’ statement that the Indian economy has made a solid recovery and is among the fastest-growing large economies despite heightened uncertainties and formidable headwinds. He said that financial stability is non-negotiable and all stakeholders in the financial system must work to always preserve this.
The S&P Global India Manufacturing PMI dropped to 57.8 in June 2023 from May’s 31-month peak of 58.7, less than market estimates of 58.0. That said, the latest print was the 24th straight month of growth in factory activity, as new export orders rose solidly, though at a softer rate, and employment gained at a moderate pace that was broadly like May. New orders expanded sharply, with the rate of rise among the strongest since February 2021. Also, output went up the most in 1-1/2 years, while buying activity rose at the second-strongest pace in over 12 years. Delivery times improved further, as vendor performance strengthened the most in 8-1/2 years. Capacity pressures remained mild, with backlogs of work increasing for the 18th month in a row but only slightly. On prices, input cost inflation was among the lowest in three years. However, output charge inflation hit its highest in 13 months. Finally, sentiment rose to a 6-month top, linked to forecasts toward growth prospects.
The annual inflation rate in India fell to 4.25% in May of 2023 from 4.7% in the previous month, the lowest since April 2021 and firmly below market forecasts of 4.42% amid a fresh slowdown in inflation for food. The result drove inflation closer to the RBI’s target of 4% and extended the decline past the central bank’s upper limit of 6%, paring concerns of an eventual resumption of its tightening cycle. Consumer food inflation fell to 2.91% from 3.84% in the previous month, amid significant deflation for oils and fats (-16.01% vs -12.33% in April), vegetables (-8.18% vs -6.5%), and meat and fish (-1.29% vs -1.23%). In the meantime, inflation slowed for transport and communication (1.1% vs 1.17%), housing (4.84% vs 4.91%), and fuel and light (4.64% vs 5.52%). On a monthly basis, consumer prices rose at a steady pace from the previous month at 0.51%
The country’s merchandise exports fell in May 2023. India’s merchandise exports in May fell to $34.98 billion as compared to $39.00 billion in the year-ago period. India’s overall exports (Merchandise and Services combined) in May 2023 are estimated to be USD 60.29 Billion, exhibiting a negative growth of 5.99 per cent over the same period last year. Overall imports in May 2023 are estimated to be USD 70.64 Billion, exhibiting a negative growth of 7.45 per cent over the same period last year. The country’s merchandise imports for the period April-May 2023 were USD 106.99 billion as compared to USD 119.18 billion during April-May 2022.
The Goods and Services Tax (GST) collections for the month of June 2023 stood at ₹1,61,497 crore which is 12.0% higher than the GST revenue in the same month last year, which itself was ₹1,44,616 crore. In June, revenue from domestic transactions (including imports of services) is 18% higher than in the corresponding period a year ago.
India’s foreign exchange reserves have again showed negative signs as it decreased by US$2.90 billion to $593.19 billion in the week through June 30. Foreign currency assets decreased by $2.21 billion to $525.44 billion for the week ending June 30.
The U.S. markets ended higher during the passing week after the results of the Federal Reserve’s annual bank stress test. The Fed said the results demonstrate that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession. The Fed said all 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion. Further, the rally on markets reflected optimism the U.S. economy will avoid a recession following the release of several upbeat reports. Reflecting a continued spike in orders for transportation equipment, the Commerce Department released a report showing an unexpected surge in new orders for U.S. manufactured durable goods in the month of May. The Commerce Department said durable goods orders shot up by 1.7 percent in May after jumping by an upwardly revised 1.2 percent in April. The Commerce Department released a report unexpectedly showing a sharp increase in new home sales in the U.S. in the month of May. The report said new home sales soared 12.2 percent to an annual rate of 763,000 in May after surging 3.5 percent to a revised rate of 680,000 in April. Street had expected new home sales to slump 1.2 percent to an annual rate of 675,000 from the 683,000 originally reported for the previous month. With the unexpected spike, new home sales reached their highest level since hitting a rate of 773,000 in February 2022.
European markets ended the passing week with strong gains, as positive inflation and labor market data helped ease concerns around economic recovery and interest-rate hikes. The start of the week was on a lower note, as German business confidence deteriorated to a seven-month low in June as companies were markedly pessimistic about future and their assessment about current situation worsened. A monthly survey conducted by the ifo institute showed that the business climate index slid more-than-expected to 88.5 in June from 91.5 in May. The reading was seen at 90.7. This was the lowest level since last November. Further, Finland’s consumer confidence stayed unchanged and negative in June. The survey figures from Statistics Finland showed that the consumer confidence index came in at -8.8 in June, the same as in the previous month. Separate data from the Confederation of Finnish Industries revealed that industrial sentiment continued its falling trend at the end of the second quarter.
Asian markets ended mixed during the passing week on the back of weak China data and expectations that the Federal Reserve will likely keep interest rates higher for longer to bring the inflation rate down to the 2 percent target. Seoul stocks fell slightly even as survey results from the Bank of Korea showed South Korean consumer sentiment improved to the highest level in thirteen months in June, as households’ current and future living conditions improved amid an ease in inflation. Chinese Shanghai edged marginally lower as weak industrial profits data for May underscored the uneven nature of the economic recovery and fueled the debate over the need for additional stimulus.
The National Bureau of Statistics said Chinese industrial profits declined 18.8 percent year-on-year in the January to May period amid weak demand and falling producer prices. However, losses were limited on hopes the government will roll out additional stimulus to shore up the weakening economic recovery. Traders also took note of official data showing manufacturing activity in the country shrank for a third straight month in June, albeit at a slower pace. The manufacturing PMI rose to 49.0 in June from 48.8 a month ago -matching expectations. The non-manufacturing sector continued to expand in June, with the corresponding index falling to 53.2 from 54.5 in the previous month.
However, Japanese shares rose by over a percent after data showed retail sales in the country rose for the 15th straight month in May, adding to signs of economic recovery. Besides, the country’s unemployment rate came in unchanged at 2.6 percent as expected. Traders overlooked a separate report which revealed that industrial output declined more than anticipated in May, marking the first contraction in four months.
The S&P Global US Manufacturing PMI fell to 46.3 in June 2023, pointing to the biggest contraction in the manufacturing sector since December, compared to 48.4 in May and forecasts of 48.5, preliminary estimates showed. New orders fell the most since December, with weak demand linked to muted customer confidence while foreign demand was also subdued. Also, input buying fell at the steepest rate since January, and both pre- and post-production inventories declined sharply. On the price front, cost pressures continued to dwindle, as suppliers sought to boost their sales and offer reduced prices. Input prices fell the most since May 2020 and selling price inflation was the slowest in the current sequence of inflation. Meanwhile, greater success in finding suitable candidates allowed firms to expand their workforce numbers. Finally, the degree of optimism was the weakest in 2023 so far, amid customer hesitancy and inflationary concerns.
The HCOB Eurozone Manufacturing PMI was revised downwards to 43.4 in June 2023 from the preliminary estimate of 43.6, indicating the sharpest deterioration in the sector’s health since May 2020. Output experienced the most significant contraction since October of the previous year, and total new order intakes declined at the strongest pace in eight months. Additionally, factory staffing levels were reduced for the first time since January 2021 and input purchasing declined at a substantial pace, ranking among the fastest declines in 26 years of data collection. On the price front, input costs dropped the most since July 2009, and output charges fell at the quickest pace in three years. Lastly, business confidence dipped to a seven-month low.
The au Jibun Bank Japan Manufacturing PMI was at 49.8 in June 2023, unrevised from preliminary estimates, and after a final 50.6 in May, which was the highest reading in seven months. This was the fifth contraction in factory activity so far this year, as both output and new orders shrank, with new export orders falling at the steepest pace since February. In response to weaker operating conditions, buying activity fell for the eleventh month in a row with the reduction being the joint-softest recorded this year. Employment increased to the second-fastest pace in the year to date. Meanwhile, vendor performance improved as suppliers’ delivery times shortened to the greatest degree since March 2016. On the pricing front, input cost inflation eased to the softest pace since February 2021, while output cost inflation slowed to a 21-month low. Finally, business sentiment strengthened to the strongest since October 2021 amid economic recovery.
Going Ahead
The performance of the Indian equity market has been encouraging in first three months of the current fiscal year. The bellwether large cap equity indices are currently trading at all-time highs. During the current fiscal year, large cap indices have gained about 20%, while mid and small cap indices have gained about 30%. The current rally has been fueled by improvements in global geopolitics, a significant softening of global inflation, the toning down of the aggressiveness of several major central banks in terms of monetary tightening, and slightly better-than-expected corporate earnings. With the bellwether large cap indices setting new highs in recent days, the equity market outlook is positive. However, the rapidity with which the market has rallied has caused concerns for investors about the rally’s continuation. There are also questions about whether investors should book profits at current levels. We are very optimistic about the Indian equity market’s medium to long-term prospects. We also believe that, at current levels, mid and small cap companies will outperform large cap companies.
In terms of macroeconomic fundamentals, India continues to outperform the rest of the world’s major economies. Corporate profit growth was slower than nominal GDP growth in the previous fiscal year. This year, we expect corporate margins to improve as input cost pressures ease. As a result, we anticipate that corporate earnings will grow significantly faster than nominal GDP growth during the current fiscal year. This is the primary reason for our optimistic view of the Indian equity market in the medium to long term. Domestic liquidity flows into the equity market, particularly through systematic investment plans into equity mutual fund schemes, continue to be significant. Foreign investment flows into the equity market, which was extremely negative last year, have turned positive this fiscal year. As a result, the flow of liquidity into the equity market, both domestic and foreign, is supportive of the market’s continued rally.
With the current fiscal year’s market rally, valuation multiples of Indian equities have increased. Yet, with most analysts expecting at least 15% earnings growth over the next 12 months, valuation multiples currently remain slightly lower than the five-year average. As a result, valuations in the Indian equity market do not appear to be very expensive. This brings us back to the question: should equity investors take a partial profit at this point? This question does not have a one-size-fits-all answer. As we always argue, strategic asset allocation accounts for more than 90% of portfolio return while market timing or specific instrument selection plays relatively minor roles.
Once the strategic asset allocation has been determined, investors should avoid reacting to short-term market movements, news flows, events, and changes in investor sentiment. We however rule out a minor correction in the Indian equity market in the near term. In fact, I would point out that we have seen around 10% market correction from the year’s peak in most years in the last 20 years. As a result, a similar level of market correction is possible this year as well. At the same time, it is equally likely that the market could rise another 5% to 10% in a short period of time. That is why we always emphasize that consistently timing the market is nearly impossible. A better long-term wealth creation strategy is to stick to strategic asset allocation and do required rebalancing accordingly.