Market Outlook for the month:

August 2024 Market Performance Summary: Economic Resilience Amidst Sectoral Variations:

In August 2024, the Nifty-50 index managed to navigate significant global market volatility, closing about 1% higher and reaching a new all-time high of 25,268. This marked the third consecutive month of higher highs for the index. Mid-cap and small-cap indices also saw gains, each increasing by 1% over the month.

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Foreign Portfolio Investments (FPI) into equities totalled Rs 7,300 crores in August, down from Rs 32,400 crores in July. This brought the year-to-date FPI inflows for 2024 to Rs 42,900 crores, a notable decline from the Rs 1,35,300 crores recorded in the same period of 2023.

The Reserve Bank of India (RBI) maintained its key interest rate at 6.5%, as expected. Inflation and GDP growth forecasts for FY25 remained steady at 4.5% and 7.2%, respectively. Domestic institutional and retail investors played a key role in supporting the market with continued strong buying activity.

In a significant development, India’s foreign exchange reserves hit a new all-time high in August, exceeding the previous record of $667 billion set in July. This increase reflects the Reserve Bank’s proactive currency management amid ongoing global economic and geopolitical challenges.

Sectoral performance

August 2024 brought a diverse range of outcomes for the Indian stock market, with some sectors outperforming others. Leading the charge were Information Technology (IT), Pharmaceuticals, and Fast-Moving Consumer Goods (FMCG), which saw strong growth. These industries thrived, largely driven by the strength of the US dollar and positive macroeconomic trends. IT and Pharma, in particular, reaped the benefits of heightened demand alongside favorable currency fluctuations, leading to impressive performance in these areas. Conversely, the PSU Banking, Media and Energy sectors underperformed.

In FYTD24, various sectors of the Indian market exhibited differing capital flow patterns. Financial Services, Metals, Auto, Materials, Real Estate, Power, Construction, and Capital Goods saw outflows of Rs 12,010 crores, Rs 3,770 crores, Rs 2,380 crores, Rs 1,270 crores, Rs 1,170 crores, Rs 1,030 crores, Rs 760 crores, and Rs 310 crores, respectively.

Conversely, sectors such as IT, Healthcare, Consumer Durables, Consumer Services, FMCG, Diversified, Media, and Oil & Gas attracted inflows of Rs 6,200 crores, Rs 5,830 crores, Rs 5,090 crores, Rs 4,160 crores, Rs 3,600 crores, Rs 2,060 crores, Rs 1,860 crores, and Rs 1,210 crores, respectively.

In the following sections, we provide a more comprehensive examination and detailed insights of some major sectors:

Auto:

The Indian auto sector displayed mixed performance in August 2024, with certain segments seeing moderate growth while others faced challenges due to demand fluctuations and weather conditions.

1. Wholesales Growth:
   • Overall automobile wholesales of listed companies grew by 5.9% year-over-year (YoY), reaching 14.6 lakh units. Export growth was a strong contributor, rising by 10.8% YoY to 2.7 lakh units, reflecting demand from international markets.
2. Two-Wheeler Segment:
   • Domestic two-wheeler wholesales rose by 9.9% YoY, with 10.6 lakh units sold. However, this growth was slower than expected due to widespread heavy rains across India, impacting consumer demand. Despite this, export activity increased by 9.3% YoY, driven by inventory build-up.
3. Passenger Vehicles:
   • Passenger vehicle sales saw a decline of 3.5% YoY, with 2.3 lakh units sold. The drop in demand can be attributed to manufacturers working to manage high inventory levels ahead of the upcoming festive season. Additionally, demand for smaller cars remains weak, and further inventory build-up is anticipated in the entry-level car segment.
4. Dealer Challenges:
   • According to the Federation of Automobile Dealers Association (FADA), dealers are facing hurdles with low customer inquiries and delayed purchase decisions, exacerbated by record-high inventory levels. This has made it difficult for dealers to maintain sales momentum.
5. Commercial Vehicles:
   • The commercial vehicle segment, particularly medium and heavy commercial vehicles (MHCV) and light commercial vehicles (LCV), saw an 11% YoY decline in sales in July. The slowdown in this segment is primarily due to lower sales conversions and weak demand caused by continuous rainfall, limited finance availability, and high vehicle prices.
6. Tractors:
   • Tractor wholesales showed a slight decline of 0.6% YoY in August, with 26,117 units sold. This signals subdued demand in the rural and agricultural sectors.

The auto sector is expected to see a mixed outlook in the coming months. While two-wheeler and export growth may continue on a stable path, passenger vehicles could face further pressure due to high inventory levels and weak demand for smaller cars. The commercial vehicle segment, particularly MHCV and LCV, may struggle due to market disruptions from the monsoon season, though recovery could come as the weather stabilizes.

As the festive season approaches, manufacturers and dealers will likely focus on clearing inventory, which could boost sales in the short term, especially for higher-end vehicles. However, challenges such as muted consumer demand, high inventories, and weather-related disruptions may continue to impact the sector.

Hotels:

In August 2024, the Indian hotel industry rebounded strongly after experiencing softer pricing in July. This recovery was driven by a combination of factors, including a rise in corporate travel, long weekends, and robust growth in air traffic. As a result, Average Daily Rates (ADRs) saw healthy improvements, with a 4.1% year-over-year (YoY) increase in the lower price band and a significant 24.8% YoY rise in the upper price band. On a month-over-month basis, ADRs were up by 7% and 6% for the lower and upper price bands, respectively.

Key markets like Hyderabad and Mumbai performed exceptionally well, recording strong YoY growth in ADRs, further demonstrating the sector’s resilience. With the festive season beginning in September, ADRs are expected to rise further, supported by sustained demand.

In addition to pricing improvements, major hotel chains were active in expanding their portfolios. Companies like IHCL and Lemon Tree Hotels added multiple new properties through management contracts and license agreements, reflecting the ongoing consolidation within the sector. The aggressive addition of inventory signals the industry’s confidence in future demand, as the shift from unorganized to organized players continues to reshape the domestic hospitality landscape. Overall, the sector is well-positioned for continued growth in the coming months.Banking: In July 2024, the growth rate for non-food credit in the banking sector moderated to 13.7% year-over-year (YoY), down from 17.4% in June. Excluding major financial institutions, credit growth was slightly higher at 15.1% YoY. This slowdown was primarily attributed to reduced growth in the services and retail sectors. Specifically, the services sector saw its YoY growth rate decrease to 14.0% (15.4% excluding major financial institutions) from 17.4% the previous month. On the other hand, non-banking financial companies (NBFCs) reported an increase in credit growth to 12.7% YoY in July, up from 8.5% in June.

Retail credit growth also slowed, reaching 14.4% YoY (17.8% excluding major financial institutions), compared to 25.6% in June. This decline was mainly due to weaker performance in housing, credit cards, and education loans. However, industrial loans grew by 10.1% YoY (10.2% excluding major financial institutions), an improvement from the 8.1% growth in June. Deposit growth continued to decelerate, standing at 10.9% as of August 9, 2024, down from 13.8% in March.

Deposit rates experienced a slight rise, with the weighted average domestic term deposit rate (WADTDR) increasing by 1 basis point month-over-month in July. Additionally, the weighted average lending rate (WALR) for new rupee loans went up by 8 basis points in July, reversing a decline of 13 basis points in June. As of July, the WADTDR on outstanding deposits was 6.92%, while the WALR on outstanding rupee loans was 9.89%, and fresh rupee loans stood at 9.40%.

Forward Outlook

For FY25, the banking sector is expected to maintain credit growth in the 14-15% range, driven by a rebound in retail credit and increased corporate lending. The housing sector is likely to see positive growth, supported by the expected central bank’s decision to cut rates and ongoing government initiatives for affordable housing. Despite the strong credit growth, slower deposit growth may lead to further increases in both deposit and lending rates as the sector adjusts to these conditions.

Important events & updates

A few important events of the last month and upcoming ones are as below:

1. In July 2024, India’s infrastructure output grew by 6.1% year-on-year, building on a revised increase of 5.1% in June. This continued expansion reflects a robust performance in key infrastructure sectors, indicating sustained growth and development in the country’s infrastructure landscape.
2. In the June quarter of 2024, India’s economy grew by 6.7% year-on-year, slowing from 7.8% in the previous quarter and missing the expected 6.9% growth. This slowdown, the weakest in five quarters, was driven by reduced government spending due to election-related disruptions. Despite this, consumer spending data indicates some resilience to high interest rates, which could bolster calls for a more dovish stance from the RBI.
3. In August 2024, the HSBC India Manufacturing PMI slipped to 57.5, below the flash estimate of 57.9 and market expectations of 58. Despite the decline, growth in new orders and output remained strong by historical standards.
4. In August 2024, the HSBC India Services PMI was revised to a five-month high of 60.9, up from 60.4 in preliminary estimates and 60.3 in July. This marks the 38th consecutive month of growth, driven by higher new business and strong demand.
5. Deposit growth in India was reported at 10.8% in Aug 2024.
6. In August 2024, the HSBC India Composite PMI stood at 60.7, slightly above the flash estimate of 60.5 and matching July’s figure. The index remains well above its long-term average of 54.6.

Fundamental outlook: 

In September 2024, India’s GDP growth slowed to 6.7% year-on-year for the June quarter, down from 7.8% in the previous quarter and below the expected 6.9%. This deceleration is largely due to reduced government spending related to the general elections.

Despite this, inflation estimates and economic indicators suggest resilience against high interest rates, which may influence future Reserve Bank of India (RBI) policy decisions. India’s economy remains strong, with continued growth across various sectors and a notable rise in UPI transactions, signaling progress toward a digitized economy and a recovery in services.

Forex reserves reached a record $683.99 billion in September 2024, supported by effective monetary policies and currency stability. The RBI maintained its policy rate at 6.5% in August, reflecting confidence in the economy. However, given the slower-than-expected GDP growth, a rate cut may be on the horizon in the coming months.

Technical outlook.

The Indian stock market is maintaining a positive trend despite global volatility. The infrastructure sector saw a solid 6.1% year-on-year output increase in July, an improvement from June’s 5.1%. While the HSBC India Manufacturing PMI fell to 57.5 in August, below the flash estimate, it remains strong compared to historical averages.

Conversely, the HSBC India Services PMI rose to a five-month high of 60.9, continuing its expansion streak for 38 months. The HSBC India Composite PMI held steady at 60.7, well above its long-term average, demonstrating sector resilience.

The primary support level for the market is at 24,500, with significant resistance at 25,150 and a major resistance point at 25,300.

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Outlook for the Global Market

US Market:

As of September 2024, the U.S. economic environment is shaped by the Federal Reserve’s substantial interest rate hikes, which have been enacted nearly a dozen times since 2021. The central bank’s approach to curb inflation through higher borrowing costs seems to be showing results in tempering price increases. The Consumer Price Index (CPI) data reveals that June saw a reduction in overall price levels, marking the first decrease in months. Although July experienced a slight month-over-month rise of 0.2% and a year-over-year increase of 2.9%, these figures are moving closer to the Fed’s 2% inflation target, signaling progress in controlling inflation.

However, these measures have had mixed effects on economic activity. After a brief dip in early August due to disappointing job data that sparked recession concerns, the stock market recovered and neared previous highs by the end of the month. This rebound is attributed to the easing of inflation, lowering interest rates, and expectations of a more accommodating monetary policy.

The Federal Reserve is anticipated to lower rates by 25 basis points in September, with speculation about additional future cuts. This expected reduction is a response to the deceleration in economic growth, aimed at sustaining economic momentum.

In the labor market, the Job Openings and Labor Turnover Survey (JOLTS) for July indicated a drop in the job openings rate to 4.6%, the lowest since December 2020. This figure aligns with pre-pandemic levels, suggesting a significant easing in the job market’s tightness. Despite this, the job openings rate remains relatively high, reflecting ongoing demand for workers despite the economic slowdown.

Looking forward, the forthcoming elections are likely to introduce further market volatility, adding an additional layer of uncertainty to the economic outlook.

Eurozone:

In August 2024, inflation across the 20-member Eurozone remained notably low, presenting a favorable scenario for the European Central Bank (ECB) to consider further rate cuts in September. The Consumer Price Index (CPI) rose by only 2.2% compared to the previous year, down from 2.6% the month before and reaching its lowest level since July 2021. Month-over-month, prices increased by 0.2%, partly due to a significant drop in energy costs.

Inflation rates varied across major Eurozone countries: Germany recorded 2%, France 2.2%, Italy 1.3%, Spain 2.4%, the Netherlands 3.3%, and Belgium 4.5%. The market’s reaction to this data was subdued, indicating that investors were largely expecting these results.

With the U.S. Federal Reserve anticipated to initiate rate cuts in September, with many forecasting a reduction of 50 basis points, the environment for the ECB to implement a second rate cut has become more conducive. This potential move aligns with the ongoing trend of easing monetary policy across major economies.

Outlook for Gold:

In recent months, gold prices have largely remained steady after experiencing a period of upward momentum. Moving forward, gold is anticipated to maintain a neutral to slightly positive outlook at current price levels. This expectation is driven by ongoing concerns about a possible slowdown in the U.S. economy, which continues to bolster gold’s appeal as a safe-haven asset.

What should Investors do?

Given the recent economic data and market trends, we remain confident in the long-term growth prospects of the Indian equity market. The ongoing capital expenditure (Capex) surge is strengthening banks and fostering credit growth, which is expected to further bolster the positive market outlook. However, with current market valuations, which has become slightly more expensive, the key driver of future returns will likely be an increase in corporate earnings and global macro.

In light of these factors, we recommend maintaining a diversified portfolio and continuing to invest in the market. Asset allocation and sector rotation will be crucial for generating outperformance in FY25. While current valuations may limit short-term gains, market dips provide a strategic opportunity to build positions in high-quality companies. Investors should focus on sectors poised for growth, supported by strong fundamentals.

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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