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The benchmark index Nifty 50 has staged a remarkable recovery, rising closer to all-time high closing levels this month. Post the recent gains, the Nifty 50 is up 4 percent from January 1 this year, outperforming global markets. The S&P 500 index is down 17 percent so far this year.
The performance is not completely driven by earnings. In fact, the recent quarterly results showed a moderation in the earnings growth rates of metals and IT companies. The performance of the pharmaceutical companies has been patchy.
Yet the return of foreign portfolio investors (FPI) helped the Nifty 50 index reverse the downtrend, masking a retreat by local investors. “The September 2022 quarter saw a reversal in the steady climb-up in the domestic holding trend as direct retail saw outflows. Foreign portfolio investors selling reversed,” point out analysts at Jefferies India.
India’s relatively stable economic picture may be attracting overseas investors such as sovereign wealth funds who drove purchases in recent months. The country has enough foreign reserves to defend the rupee. Inflation is not as rampant as in the West and the COVID pandemic is waning.
In fact, the high raw material costs and inflation that afflicted corporate earnings and triggered interest rate hikes by the Reserve Bank of India (RBI) are showing signs of moderation. Wholesale prices grew at slowest pace in 19 months in October and retail inflation eased to 6.8 percent.
Profit margins of the IT companies are on the mend and automobile makers are selling more cars on easing supply chain constraints. With commodity prices in the international markets are easing and the rupee showing signs of stabilisation, the recovery in the Indian markets can continue, writes Vijay Bhambwani in this piece. “Fossil fuels (oil & gas) are not showing any signs of a runaway rally at least for now. If these prices stabilize, we have clarity on our energy bills, unlike Europe which is reeling from spiking energy costs,” he adds.
Even then, investors should not get carried by the equity market recovery. The headline retail inflation still remains above the RBI’s comfort zone. The reduction in inflation last month is largely due to a favourable base in October last year. Sequentially, consumer prices rose 0.8 percent in October, the highest monthly rise since May this year, points out Manas Chakravarty in this piece.
“The ‘core’ consumer price index, which excludes food and fuel prices and is sometimes taken as a yardstick of pricing power by firms, has remained sticky, despite a favourable base effect in October. Here too, the month-on-month momentum accelerated in October,” he writes.
And then there is a fear that global economic pressures are yet to fully reflect in the domestic economy. Textile and garments are seeing weak demand. Large technology companies which rode the COVID led boom for digital services are reducing employees, stoking demand concerns for IT services. The erratic monsoon this year has impacted crop yields. This can weigh on rural incomes and consumption in the near term.
So, while investors may cheer the recovery in the benchmark stock market indices, they should be wary about the adverse global economic conditions and its impact on the Indian economy in the near term. “We have long argued that GDP growth will soften in 2HFY23, as exports slow, replacement demand for capex runs its course, and the demand for pent-up services eases. The soft industrial production data for the quarter ending September makes us confident of our long-held below-consensus growth forecast of 6.8 percent for FY23,” note economists at HSBC.
Investing insights from our research team
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Ruchira Papers: Profit soars, sector tailwinds pave the way for valuation re-rating
Tracker
Economic Recovery Tracker | Rural consumer sentiment turns weak, power consumption up
What else are we reading?
Why pricing of off-patent drugs doesn’t solve the problem
Central banks to shift away from ‘jumbo’ rate rises as outlook darkens (republished from the FT)
Marketing Musings: The right to win
Personal Finance: What investment and running a marathon have in common
COP27 Snafu | No progress at Sharm El-Sheikh
FIFA World Cup 2022 | Qatar ready to display Arab world’s sporting might; Olympics next?
Technical Picks: Ambuja Cements, Granules, Nifty, Pfizer and Lead (These are published every trading day before markets open and can be read on the app)
R Sree Ram Moneycontrol Pro
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