PERSONALISED INVESTMENT MANAGERS

Monthly Market Roundup: Sep '21

12 October, 2021


          
            Monthly Market Roundup: Sep '21

Executive Summary – Sept, 2021

Debt Markets

  • Yielding historically low returns now
  • Interest rates are expected to reverse soon
    Read More

Debt Markets

  • Yielding historically low returns now
  • Interest rates are expected to reverse soon
    Read More

Update on US FED

  • Tapering (reducing liquidity) will start soon (but there is no timeline as of now)
  • Interest rates in US is expected to raise in mid of year 2022 itself instead of earlier perceived year 2023

Equity Markets

  • Valuations are definitely stretched by all metrics (PE, PB, Market Cap to GDP)
  • Sustainability of earnings momentum is key monitorable Read More

Equity Markets

  • Valuations are definitely stretched by all metrics (PE, PB, Market Cap to GDP)
  • Sustainability of earnings momentum is key monitorable Read More

Risks for Current Markets levels

  • Tapering
  • Logistics Cost and Spike in Raw material cost for all export & consumption oriented sectors
  • Attrition and Raise in employee cost for IT Sector
  • Delay in Privatization for PSUs, Delay in CapEx execution, Delay in credit growth revival

Tailwinds for Current Market Rally

  • Global Strategy of China+1
  • Low interest rates, Low Tax Rates, Raising of Income levels especially around IT hubs
  • Strong Infra spending by Government along with emergence of Private CapEx in pockets
  • Slow down and Power crunch in China

Tailwinds for Current Market Rally

  • Global Strategy of China+1
  • Low interest rates, Low Tax Rates, Raising of Income levels especially around IT hubs,
  • Strong Infra spending by Government along with emergence of Private CapEx in pockets
  • Slow down and Power crunch in China

What to do now @ 60000 SENSEX

  • Short Term – Best time to book profits for short term cash requirements
  • Long Term – Stay invested and continue SIPs & STPs

Indian Largecap indices continued its uptrend further in September, 2021. Both Largecap indices NIFTY & SENSEX went up by 2.8% and 2.7% respectively. In Sept, 2021 – SENSEX reached its another milestone of 60000 mark. Meanwhile, Mid and Smallcap segment of markets regained its dominance again over the largecaps. Overall the breadth of broader market was quite strong and vibrant despite the largecap indices marginally off the highs at the end of month.

MONTH ON MONTH PERFORMANCE OF MAJOR INDICES

Index MoM Change %
SENSEX  2.7%
NIFTY 50 2.8%
NIFTY MIDCAP 100 6.9%
NIFTY SMALLCAP 100 6.1%
NIFTY 500 3.4%

 

Performance Details Over Time

Inflation: India’s retail price inflation further eased to 5.30% in August, 2021. Prices rose at a softer pace for food, Pan, tobacco, transport and communication. Meanwhile, inflation picked up for Fuel & light, clothing, footwear and housing.

Core Sector Growth: The performance of eight core sectors has been strong in Aug, 2021 with the base effect at play. The core sector output grew by 11.6% in Aug, 2021 compared with 9.9% in July, 2021 and de-growth of 6.9% in Aug, 2020. This expansion in the output can be ascribed to strong growth in Coal, Natural gas, Cement and Power sector. However, the performance of core sectors on a sequential basis has been marginally lower by 0.9% over the previous month.

Brent Crude – Brent crude is inching upwards and it raised 4.1% in Sept, 2021 and settled at $76.44 per barrel. Current prices of Brent is at its 3 year high and this rebound is attributed to the damage by hurricane Ida delayed the outputs and also due to modest spike in output from OPEC+ which was just 50K b/d V/s planned 400K b/d. The sharp spike in LNG prices in Europe as well as Asia also triggered the additional demand for liquid fuels which further lifted crude prices. The upcoming winter is expected to keep the crude prices upwards.

Indian currency - Rupee depreciated by 1.7% in Sept, 2021 and settled at ₹74.16/USD. Despite there is FII inflows of $1.8 billion, higher imports in Sept, 2021 led to the 1.7% depreciation of rupee.

FII Inflows – FIIs poured ₹13154 Cr into Indian equities in Sept, 2021 and ₹12804 into debt. DIIs also bought Indian equities to the tune of ₹6949 Cr almost the similar value in previous month.


Market Outlook

DEBT

  • The 10 year benchmark yield settled at 6.223% on 30-Sept-2021 against 6.215% in 31-Aug-2021.
  • With regard to Govt. Finances (fiscal deficit), currently fiscal deficit for 1-April to 31st Aug-2021 period is, 31% of base estimates and it is significantly lower and it improves scope for Govt to accelerate spending towards Infra. Due to record high tax collection, Government sticks to its original borrowing program and Planned CapEX towards Infrastructure are also intact. This is positive for bond markets.
  • The surplus liquidity in the banking systems stands at ₹7 trillion. RBI intends to maintain the surplus liquidity through various tools available under its purview.
  • With regard to inflation, it cooled off and being within RBI’s target for past couple of months. However, it is expected to spike in coming months due to raise in oil prices. CPI inflation is expected to normalize between 5%-5.75% in FY22 according to RBI & expected GDP growth for FY22 is 9.50% as per RBI.
  • Overall, globally interest rates seems to have bottomed out and there are very less probability for further downside of interest rate.Hence, in medium to long term, reversal of interest rates are more likely however, nobody will be able to predict when it will happen. Due to this, the returns from debt as a asset class is quite low and it requires more time to get bit higher return from debt as a asset class.
  • We reiterate our suggestion to all our investors to stay away from long term bond funds, credit risk funds due to both interest rate risk as well as credit risk.

Following are other interesting events happening in Bond Markets

  • Indian G-Secs are expected to be included in global bond index in near future. According to Morgan Stanley estimates, This inclusion of G-Sec in bond index alone is expected to bring foreign inflows to the tune of $36 billion in 2 years and interestingly, this is almost same inflows received from FIIs in past 10 years. This additional demand for G-Secs is going to keep our yields under check and it is very positive for Govt finances since borrowing cost is going to be lower.
  • International settlement of G-Sec and Repo window for Insurance companies does also have the potential to attract more inflows into Indian G-Sec from FIIs. It is again positive for bond markets.

Market Outlook

GOLD

  • On Sept, 2021 – Gold corrected by 3% and settled at $1756 per ounce.
  • Due to the various global events in Sept, 2021 i.e Evergrande issue in China, Raise in oil prices, Raise in US Bond yields have strengthened the USD which eventually caused the correction in Gold. USD and Gold both have inverse relation on price movement.
  • Price movement of gold is sensitive to geo-political events, uncertain economic growth etc.
  • There should be allocation to gold in the portfolio to the extent of 5%-10%.

Market Outlook

EQUITY (Sectoral Performance)

  • In Sept, 2021 – The new sectoral leaders emerged strongly and they are Realty, Energy and Media. There was rebound visible in Autos as well as Banks. IT and Pharma was flat meanwhile, Metals corrected MoM.
  • Rebound in energy sector is attributed to Coal India as well as NTPC both went up more than 20% along with ONGC in Sept, 2021.
  • The performance of Media is solely due to the spike in prices of Zee entertainment and it is basically due to a news about merger of Zee with Sony.
  • Post emergence of Evergrande issue in China, there was sharp reversal in steel stocks due to expected weak demand from China. However, non-ferrous stocks in Aluminum, NALCO continued their uptrend.
  • Following are YTD performance of sectoral indices with major NIFTY indices.

Surprise in Sectoral Performance

There are various events, triggers occurred in Sept, 2021 and all of them led to volatility in Indian as well as global equity markets, Following are summary of few of them,

Tapering - US Fed announced that Tapering (reduction in bond purchase) will start soon however, there is no tentative time line. There is also a view from FED chief that interest hike may be preponed in mid of year 2022 instead of year 2023.

Energy Crisis & Hike in Oil & Gas prices- There is heavy shortage of natural gas in Europe and around the world and China has also cut its production and started to import natural gas. Due to this shortage, European gas prices surged by almost 500% in past year. The storage of Natural gas in Europe as well as China are historical low levels. The upcoming winter is expected to deepen this crisis since Eruope had shut its Coal based plats already.

Slowdown in China - There seems a slowdown in China emanating from Govt action on shutting down steel plants, chemical plants due to environmental issues etc. There is massive power shortage in China and many provinces in China have raised the power prices by 25%. All these issues cause the slowdown in China’s economy.

Evergrande – The largest property developer in China Evergrande is trying to manage its massive debt which is estimated to be around $305 billion and it could spark broader risks to China’s financial system if not stabilized. However, Evergrande’s debt is predominantly within China and global banks does not have much exposure. There are already many headlines which compares Evergrade with Lehman moment in 2008 however, it does not look on that direction as of now.

US Bond Yields – Due to the above all issues, USD strengthened and it caused the spike in US bond yields or vice versa.

  • However, when there is so many uncertain events happening around globe, usually there would be risk-off trade in Indian equities and Usually, money will flow out of asset heavy and cyclical businesses to the perceived safe pockets of markets i.e FMCG, IT, Pharma etc. However, the outperforming sector during this period are asset heavy and leveraged businesses in Power, Energy, Infrastructure, PSUs etc.
  • Meanwhile, the broader markets (Mid & Small) continued its dominance in Sept, 2021.
  • This behavior of Indian equities seems contradictory and it looks like that market rewards the undervalued segments of market with an anticipated CapEX led recovery in economy. The Privatization of Air India and Power sector reforms would enable and strengthen this dominance in price performance of these Asset heavy businesses. It is interesting to note that these sectors have been once written off due to ESG concerns etc however, now market recognize and rewards due to its essentiality especially in Power and Mining segment.

Valuations

  • As per Market cap to GDP basis, Indian markets are 123% of GDP (on trailing basis) and it is higher than historical average 75% of GDP.However, it is still way below the global averages i.e. US markets are currently trading around 2.2X times of its GDP.
  • As per price to book basis, current markets are trading at 3.6X of book value on 12 months trailing basis and It is higher than the historical average of 2.9X.
  • As per price to earnings basis, current markets are trading at 27.6X of 12 months trailing earnings and it is higher than historical average of 19.5X.
    • Following are consensus estimates of NIFTY earnings for next two years. According to this, current markets are trading at 26X of FY22 earnings and 22X of FY23 earnings.
    • Overall, due to the sharp rebound in the markets and the availability of massive liquidity, valuations are definitely stretched in the short term.
    • After witnessing more positives in past 4 quarters, now we are entering into earnings season of Q2FY22. As per the sharp rally in markets in past couple of months, Markets seems to have discounted the good earnings season however, let us gear up towards original numbers.
    Earnings Estimate FY19 FY20 FY21 FY22E FY23E
    NIFTY EPS 470 440 515 685 815
    Growth % -6% 17% 33% 19%
    Current NIFTY (30-Sept-2021) 17618
    1 Year Forward PE 26
    2 Year Forward PE 22
    Source: ICICI directresearch
    • The risk for earnings for important constituents of the markets are as follows,
      1. IT Sector – Attrition rate, high employee cost, Lower than expected deal wins
      2. Auto – Low production due to chip shortage, Disruption due to EV, High Raw material cost,
      3. Banking – Delayed revival of credit growth,
      4. Chemicals – Delayed execution of CapEx, Lower than expected growth
      5. All export oriented sectors / stocks – Higher logistics cost,
      6. PSUs – Delay in Privatisation,
      7. Pharma – US FDA Inspection (If any observation on manufacturing facilities), Pricing in US Generic market,
      8. Metals – Reversal in commodity prices due to less demand (however, demand is strong right now). ole in Q1FY22 earnings.
    • Following tailwinds are playing out fully now. The ongoing vaccination drive should support further revival of travel and hospitality sector which will revive the demand throughout the country.
      1. China+1 strategy,
      2. lower interest rate, lower tax rates, deleveraged balance sheets of Indian corporates,
      3. Commodity cycle due to supply glut,
      4. Emergence of private CapEx,
      5. Strong Infra spending from Government
      6. Higher earnings & salary hike for individual and the same led to revival in Real estate sector as a whole
    • As of now, the unanswered questions are that whether the demand in the economy is due to pent-up or structural. If the demand trend is structural, it should show up in upcoming few quarters results.

    Outlook

    • It is impossible to time the short term market levels.
    • Volatility is expected to continue and downside risk is getting more in select pockets of the markets due to stretched valuation.In case of any short term fund requirement, current levels of the market provides THE BEST opportunity to book profits. However, in case of long term – remain invested during the volatile markets is the best solution to create the wealth.
    • Corrections occur every year in the market (SENSEX) due to various reasons and thereafter, it rebounds strongly. The below chart depicts the historical corrections happened in SENSEX every year at some point of time. According to this, 10%-20% of corrections are always possible. However, the investors who remain invested without panic during such tough phases have generated wealth over the long period.

    • We suggest you to remain invested, continue your SIPs & STPs as it is. In case of any correction, we will do the lump-sum switches to the targeted funds. As mentioned above, it is also time to create a cash IF THERE IS PERSONAL NEED.


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