The bear rally:
The markets in the month of Oct rallied by about ~5%, in line with its global peers, and performed as per our outlooks expectation. The Indian market was decisively positive after the downturn of ~4% in September. FII’s were net sellers last month but sold only ~500 Crs worth of equity and this was mainly due to increasing interest rates by the fed (75 bps latest) which is causing the weakening rupee. The DIIs have been net buyers and have bought more than 9K Crs. Nifty closed out at 1800 levels and Sensex closed out at 50700 levels.
Sectorial performance
Looking at the sectorial performance for the month of Oct, almost all sectors performed positively. There were a few sectors that gave stellar returns, i.e Banking, Metal, and Auto. The Tech sector is currently under pressure due to a decrease in demand in Europe and US which has dried up mega deals. Pharma, consumer durables, and FMCG and chemical sector might face some headwinds in the near term due to pressure on their margins due to currently high raw material costs but the raw material prices have been decreasing due to softening global demand because of the fear of recession. The sectors which can do well this month include Banking, Auto, etc.
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Important events & Updates
A few important events of the last month and upcoming ones:
- The FOMC raised its policy rate by 75bp as expected, and chair Powell firmly quashed any talk of an imminent pause in rate hikes, and it is expected to stay the course of monetary tightening until the inflation gets under control.
- India’s CPI in October was around 7.41%, which was a little higher than the consensus of 7.3%.
- The IMF’s global economic forecasts, revised at the end of Oct’22 during the half-yearly IMF/World Bank meetings, show Advanced Economies are likely to grow just 1.1% in CY23, and in contrast Emerging Markets and Developing Economies are likely to grow 3.7% both this year and next.
- GST collection stood at Rs 1.52 lakh crore in October, which is the second highest ever.
- Indian banks’ loans rose 9.1% in Oct. Outstanding loans rose 502.20 billion rupees to 74.12 trillion rupees, as non-food credit rose 400.70 billion rupees to 73.10 trillion rupees and food credit rose 101.60 billion rupees to 1.02 trillion rupees.
- India’s manufacturing sector activity in October (55.3) was boosted by strengthening demand conditions, softening raw material prices, and CAPEX.
Outlook for the Indian Market
Indian economy is a bright spot among its global peers as several macro indicators such as manufacturing and service PMI have been higher than expected consensus and this has mainly been due to an increase in consumption in rural as well as urban domestic markets. The Global markets have been battered due to high inflation and energy prices due to the conflict in Ukraine; this is also having an impact on the Indian economy due to higher energy and raw material prices and the raising interest rate by the Fed has caused the rupee to depreciate (but this seems to be reversing and is expected to come down soon due to this ‘imported inflation’ will reduce) so the Indian companies will experience near-term margin headwinds, But the medium-term growth outlook remains strong. The capital ratios of the banks have significantly improved and most banks are sitting on healthy, this is visible in the 2Q results as banks have seen a rise in profits, faster loan growth, and a reduction in stressed assets. The outlook for this month on fundamental & technicals is explained.
Fundamental outlook: The month of Nov is expected to be volatile and may consolidate, looking at the current macroeconomic factors such as high inflation and elevated energy prices driving the markets. High-frequency indicators like GST (2nd highest ever in Oct), and PMI continue to be strong in Oct-22. The latest print of CPI inflation has increased to 7.4% in Oct-22 compared to 7% in Sep-22. However, commodities have seen weakness (But this might reverse with USD strength starting to weaken) and this could have a positive bearing on the inflation trajectory in the coming months but the still elevated energy prices are still a concern since recently OPEC cut its production by 2 million barrels which pushed up the oil price.
Technical outlook: The global markets were mostly in line and were positive but this will likely change in the coming month as increasing interest rates have been destroying demand in some regions more than others. Last month the market broke through our 1st resistance level of 17700 and ended above the 18000 level but did not breach the 2nd resistance of 18300. Looking at the technicals for Nov, there is immediate resistance at 18600 and major resistance around 19100 levels. There is immediate support at 17500 levels and major support at 16900 levels. The RSI for Nifty50 is around 65 which signifies that it is in a slightly overbought zone.
Outlook for the Global Market
The US Federal Reserve significantly boosted interest rates again, increasing the Federal Funds rate by another 75 bps to curb inflation for the 4th time and the chair Powell firmly quashed any talk of an imminent pause in rate hikes or pivot. Although headline inflation has peaked, core inflation surprisingly increased in the most recent monthly report. Job growth was stronger than expected in October despite Federal Reserve interest rate increases aimed at slowing what is still a relatively strong labor market but the pace has been decreasing and also the unemployment rate moved higher to 3.7%, while a broader jobless measure also increased, to 6.8%. The Eurozone economy continued to grow in the third quarter of 2022, albeit at a slower pace due to weaker consumer spending. The inflation continued to accelerate in October with consumer prices up a record 10.7% from a year earlier, and up 1.5% from the previous month. The energy problem seems to have reduced significantly due to gas prices being down sharply due to milder-than-expected weather, growth of non-Russian sources of gas, and success at storing gas for the winter. The Chinese economy may have already emerged from its cyclical trough in Q2 of 2022, but the road to recovery has not been smooth due mainly due to the recurring covid 19 lockdown in some major cities but this is decreasing.
Outlook for Gold
In the month of Aug, the Gold market performed negatively and was down by ~2% but the demand for gold as a hedge against rising inflation still remains strong especially now since fears of a recession are amplified. The outlook for gold remains slightly positive and relatively stable for the near term.
What should Investors do?
The Indian economy is relatively stable since the domestic macroeconomic indicators have been positive. Looking at the Q2 results, the banking sector which was muted last year has been on a rally on the back of improving asset quality and an increase in loan growth due to positive consumer spending but the other sectors such as tech and FMCG, etc. is expected to face headwinds as the deals are drying up for tech and raw material prices have been increasing for other sectors. We expect the Indian markets to mostly be driven by Q2 results and some major macro events. After considering all the factors we would recommend the investors not go for heavy investment since the valuation seems to be expensive.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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Also read: Market Outlook October 2022
