Sensex, Nifty gain 2.7% in July; analysts cautious about FIIs' future purchases

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Indian markets extended their record-breaking rally in July, marking the fifth consecutive month of gains. The bullish trend was fueled by sustained buying from foreign investors and earnings reports for the June quarter that met expectations.

India's benchmark Sensex and Nifty gained nearly 2.7 percent each in July, while BSE MidCap and SmallCap jumped over 5 percent and 7 percent, respectively. Since April, Sensex and Nifty jumped 15 percent each while BSE Smallcap advanced nearly 28 percent each.

So far this year, Foreign Institutional Investors (FIIs) have made substantial purchases, totaling $15.25 billion in local equities. Since April, their purchases amounted to an additional $17.73 billion. The continuous rally in the local equity markets has driven share valuations to elevated levels, raising concerns among analysts. As a result, they expect FIIs to adopt a cautious approach, leading to a possible moderation in their purchasing activities in the near term.

Several factors contribute to this cautious outlook. Firstly, the hawkish tone adopted by global central banks creates uncertainty in the markets and may impact investor sentiment. Secondly, there are expectations of a rise in crude oil prices, which can have adverse effects on economic conditions. Domestically, the increase in India's inflation and the weak earnings reported by a few blue-chip firms further dampen investor sentiments among FIIs.

Both the Federal Reserve and the European Central Bank implemented a 25 basis points interest rate hike last week. However, it was the Bank of Japan (BoJ) that surprised the market with its actions.

During Fed Chair Powell's speech, he adopted a dovish stance. He mentioned that the decision to hike or maintain rates in September would depend on the assessment of two additional Consumer Price Index (CPI) reports and two jobs reports that would be available by then. Powell also noted that although the job market remained tight, supply and demand were gradually aligning in a more balanced manner.

"The US Fed hinting at another rate hike amid wobbly inflation can impact the mood of global investors, resulting in fund outflows from emerging markets and making inroads into safe haven US bonds," said Shrikant Chouhan, Head of Research (Retail), Kotak Securities.

For June-quarter earnings, apart from IT and some bluechip firms like Hindustan Unilever Ltd, other firms reported in line with earnings, analysts said.

According to a Jefferies India report, many firms reported better than expected earnings so far in the June quarter. Of the 63 firms of Jefferies India coverage, 43 percent came above analyst estimates, the same pace as the past 4-qtrs average; while 33 percent came below. The remaining 24 percent were in line, Jefferies India said.

Among the 63 companies analyzed, significant EPS upgrades were observed in pharmaceutical companies such as Cipla and Dr. Reddy's, as well as in the automobile sector with Tata Motors and Ashok Leyland showing positive changes. Additionally, Colgate, UltraTech Cement, Polycab, and BPCL also experienced noteworthy EPS upgrades, the report said.

On the other hand, there were notable EPS cuts in the IT sector, including Tech Mahindra, Wipro, and Coforge. Among consumer-related companies, Hindustan Unilever (HUL) and Jubilant faced reductions in EPS forecasts. Bandhan Bank, Laurus Labs, and SRF were also among the companies that saw EPS downgrades, a Jefferies India report added.

Meanwhile, analysts are eagerly anticipating the release of several key monthly numbers, including Auto and PMI data. Additionally, the consumer price inflation figures for July will be significant.

According to economists, inflation is expected to surpass 6 percent in July, and upward pressure on prices is anticipated to persist in the upcoming quarter. Inflation is projected to remain close to 6 percent in August as well. As a result of these inflationary concerns, Indian investors have adjusted their expectations for rate cuts, pushing them back by at least a quarter to the middle of 2024, economists expect.