Market sentiments turned cautious in August, as questions on the US Fed’s next steps on arresting the inflation trajectory and linked recession fears returned, after July’s hopes on an earlier-than-expected ‘pivot’. While recent indicators have indeed pointed to an impending recession, wage growth in the US remains high enough to warrant further increases in policy rates. Inflation remains the focal point for central banks for now.
For developed markets, the MSCI World Index fell 0.6% in August, and remains deep in the red this year (-15.5%). Emerging Markets fared similarly, with the MSCI EM index down 0.4% in August, 19.7% YTD, weighed down by the equity sell-off in China, where slowing growth in a zero-covid policy have weighed on sentiments, and the recent US$44bn stimulus announcement for an US$8.3trn economy underscored the need for balance between support and rising indebtedness.
Thanks to investor optimism in the wake of relative economic resilience, and easing commodity prices, India has emerged as the best performing Asian market over the last couple of months, with the benchmark Nifty 50 Index rallying by 8.7% in July, followed by another 2.4% return in August thus far. FPIs (Foreign Portfolio Investors) turned modest buyers of Indian equities in July after nine months of incessant selling and bought equities worth US$5.7bn in August thus far—the highest monthly purchases in 20 months. With a modest YTD gain of 1.3% (As on August 23rd, 2022), Indian equities have outperformed its DM as well as EM peers.
Global debt markets saw long-end yields falling sharply in July, reversing the trend seen over previous several months. The rally, however, was short-lived, with yields moving up in August as hawkish Fed minutes signalled further rate hikes ahead in their fight against inflation. The Indian yield curve continued to flatten with yields coming off at the mid and long end of the curve in July, and somewhat further in August, even as the short end continued to inch higher on expectations of front-loaded rate hikes, after the RBI’s 50bps hike earlier in August. Persistent dollar strengthening, along with rising recessionary concerns, has continued to weigh on EM currencies including the INR (-7.4% in 2022TD to 79.9 as on August 23rd, 2022). Please have a look at our Market Roundup for more information on the performance across asset classes and geographies.
First quarter results of the listed universe continued to see top-line improvement on a continued recovery in investment demand and discretionary consumption, while an incomplete pass-through of input prices shrank margins and dragged operating performance lower. The Nifty50/Nifty 500 companies saw aggregate PAT growth 15%/19% in 1QFY23. Sector-wise, Financials saw improved asset quality, better lending rates and lower provisions; domestic sectors in general have benefitted from macro tailwinds, relative to global sectors (IT, Pharma, Commodities) that face a slowing macro environment. More detail in our Story of the month.
Our Chart of the month section this time maps the digital transition of the Indian economy over the last few years. Regardless of your age bracket, the last few years can only be described as transformational, with the right use of technology leading to unprecedented development for the economy across multiple sectors.
On the macro front, the index of industrial production rose 12.3% YoY in June, but importantly, the three-year CAGR at 2.2% is at 28-month high. CPI inflation for July remained above the 6% tolerance band for the seventh month running but was sequentially lower at 6.7%, with a narrower CPI-WPI gap as well. Food inflation remains high but dropped to a three-month low of 9.4%. Minutes of the RBI MPC showed a clear willingness to hike rates further, i.e., front-load them, even after the latest hike to 5.4% on the repo rate. Merchandise trade deteriorated further with deficit widening to an all-time high of US$30bn in July, and rains through the South-West monsoon this year were 9?ove the Long Period Average on August 23rd.
Continuing with Behavioural Finance, we had a lively and informative conversation with Prof. Prachi Deuskar, again from the Indian School of Business, on her thought-provoking paper on Regret Theory using data from the Chinese equity markets. A recorded version of the webinar would be available soon.
Our insight article tracks the advent of retail investors since the pandemic, spanning their activity and investment across segments of the market. Starting with the October 2021 edition of the Market Pulse we have continually explored this potentially long-term theme, based on India’s fundamentals and investor demographics. Our data section provides a rich set of data and insights across several dimensions. In the short term, markets and investor behaviour alike stand poised on central bank response to inflation.