The month of June was the third consecutive down month for the markets. The Nifty declined by and the Midcap Indices underperformed with a decline of . The familiar concerns continued with inflation being the biggest bugbear combined with extremely rigid crude oil prices. The Russia Ukrain conflict doesn’t seem to be ending anytime soon and Global Central bankers have turned more hawkish.
We are entering a crucial month for the stock markets as the results season will start amidst mixed data flow from companies. Consumer demand seems to be moderating in many segments while the reopening trades continue to see strong spends. The inflation impact is more on the Business to Consumer segments rather than Business to Business at this stage. The results season as such becomes very important. The tough part as usually this quarter will be to evaluate the performances in the context of the Delta wave in the first quarter of the last financial year.
One good part is that ex of crude oil all other commodities seem to be clearly topping out and some have also seen deep corrections driven both by slowing economy concerns as well as central bank actions. The imposition of export duty on Steel also has led to a nearly 25% in decline in steel prices from the top. Copper prices are also down more than 20% and Aluminium is more near 52 week lows. While this will hit commodity stock earnings substantially negatively it benefits three industries specifically.
Automobile companies benefit due to this, they had been suffering over the last two years due to continuously increasing input costs, chip shortages and various shutdowns related to the pandemic. All of this seems to be getting behind now. The small negative is the impact of higher interest rates on demand which will need to be tracked. However overall stocks are underowned and hold potential.
Capital Good companies that have strong orderbooks and operate on a fixed price basis have suffered similarly. The investment cycle has started now and should last atleast three years. Here again input costs coming down will boost margins significantly. There are some companies focussed on railways businesses which could do very well
Reopening trades like Hotels, eating out, multiplexes have everything going for them now. People might be cutting down on other expenses but not on these. I believe these stocks will do very well over 2-3 years.
The best thing for equity markets will be that central banks gain credibility in their inflation fight and inflation peaks out and starts moving down. That will provide better opportunities to invest.
Indian Markets despite higher valuations have been very resilient due to the continued flow of PF and SIP money into the markets. This is good in a way that people don’t see deep losses however ultimately we need to remember that markets are a slave of earnings and if the economy slows down and earnings come under pressure higher valuations will be unsustainable. Indian Markets also trade at nearly 110% of GDP largely due to rapid gains in loss making company valuations or those with very low earnings. This is also a risk we cannot ignore.
The good part for India is that our inflation issues are less intense than that of most western economies as our overshoot over the top end of the target range of 2-6 percent is much lesser than for most other economies. The second part is the extremely strong balance sheets of most Indian banks and NBFC’s which will help boost growth whenever corporates decide to invest and consumers decide to consume more.
There are two scenarios that can play out in my view
- Markets retest the current bottoms near 15200 Nifty and then consolidate for some time before moving up
- Markets break the recent lows move down another 5-10% and then provide excellent buying opportunities.
Both these scenarios have equal probability as macro news flow is so rapid and intense. We need to see how this plays out.
However I will leave you with an interesting data point.
The markets have now been down three months at a stretch. In the last 20 years markets have never been down 4 months at a stretch. Lets see if this time it will be different.
In a recovering economy opportunities will always present themselves and we should be ready to capture them as they arise.