Indian markets were flat in July 2021 and consolidated their previous gains. Midcap and Small cap indices are outperforming the large cap index. Following are July 2021 performance of the indices.
| Index |
MoM Change % |
| SENSEX |
0.2% |
| NIFTY 50 |
0.1% |
| NIFTY MIDCAP 100 |
3.1% |
| NIFTY SMALLCAP 100 |
8.0% |
| NIFTY 500 |
1.4% |
Following are performance details of NIFTY 50, NIFTY Midcap 100, NIFTY Small cap 100 for 1-year, 3-year, 5-year, 10-year as on 31-July-2021. As you can see all the action has happened in the past year with the Nifty Small Cap leading the charge.
Inflation: Consumer Inflation rate in India was at 6.26% in June 2021 compared to 6.30% in May, 2021. A slowdown was seen in apparel, footwear and housing, while in contrast, inflation accelerated for food and fuel.
Brent crude went up marginally by 1.64% in July 2021 from $75.20 to $76.44 per barrel. Now, the demand outlook is subdued due to the spread of Covid-19 delta variant across the globe.
Indian currency remained flat in July 2021 and INR was ₹74.337 / USD in July 2021 (previously ₹74.36 per USD in June 2021).
FII Inflows: FIIs withdrew from Indian equities to the tune of ₹11308 Cr. Meanwhile, Domestic institutional investors poured money into Indian equities to the tune of ₹18394 Cr. Inflows from DIIs were strong in past 5 months consistently. Indians are believing in their own growth story and participating in the equities market.
India received the highest inflows from FPIs in the past year amongst all emerging markets.
Market Outlook
DEBT OUTLOOK
- The 10-year benchmark yield settled at 6.20% on 31st July, 2021 against 6.05% on 30-June, 2021.
- RBI’s actions helped to minimize the volatility in bond markets significantly which is very much necessary for Government to up the spending. In continuation to this, Govt has announced extra need for ₹1.58 trillion to pay states and it may put pressure on yield however, RBI is expected to manage it well through various monetary as well as liquidity tolls called GSAP, OMOs, OT etc. 10Year G-Sec is expected to trade between 6%-6.25% for next 3 months.
- As of now, the general consensus is that the interest rates are expected to remain at current levels with continuation of accommodative stance to support the growth for near future.
- CPI inflation is expected to normalize between 5%-5.75% in FY22.
- RBI Governor has also recently mentioned that “hasty withdrawal of easy policy can undo the gains”. It further emphasises that the interest rate will continue to be at current levels minimum for near future.
- Credit risk funds, Medium- & Long-term corporate bond funds are riskier, as there are chances of default which will cause capital loss or depreciation. Previous rating downgrades and subsequent default of interest payment as well as deferment of repayment by ILFS, Zee/Essel group, DHFL, YES bank, Lakshmi Vilas Bank (perpetual bonds) reiterates the same and we suggest our clients to stay away from investing in these debt funds.
Market Outlook
GOLD
- Gold was seen trending down from August 2020 to March 2021 after a 10–12-month period of uptrend, gold prices have started rebounding from April, 2021 onwards. Gold prices made a bottom in March 2021 @ $1687 per ounce but as of July 2021, it had rebounded by 7.49% & settled at $1813 per ounce.
- In past three months, there are positive news flows which support the gold price movement and following are few of them.
- As per JP Morgan on 19-May-2021, “Big institutional investors are dumping Bitcoin and going back into Gold”
- Russia intends to do fresh gold buying through its Sovereign Wealth Fund along with Euro, Yen and intends to reduce its dollar reserves.
- Price movement of gold is sensitive to geo-political events, uncertain economic growth etc.
- Along with this, dwindling gold supply and fall in new gold discoveries will drive the prices over the long periods. The larger trend of USD depreciation will stabilize gold price with an appreciation bias.
- There should be allocation to gold in the portfolio to the extent of 5%-10%.
Market Outlook
EQUITY (Sectoral Performance)
- In July 2021 – Metals and Mining, Soft commodities (Sugar) consolidated their leadership position for the third consecutive month. The rallying was massive till April 2021 and still attempting to rally further. We are yet to see the strength of the ongoing rally.
- Midcap and Small cap IT (along with ER&D stocks) & Select Midcap Pharma, Specialty chemicals stocks continued their strength throughout the month and predominantly consolidated their gains.
- Large cap IT stocks continued their move further up in July 2021 and a few undervalued large cap IT stocks (compared to TCS & Infosys) have also joined the uptrend (i.e., Tech Mahindra & HCL Tech).
- Textiles, Paper, Plastic pipes, Cement are also among the sectoral leadership charts.
- Banks and NBFCs attempt to rally in July, 2021 ended after 6 months of consolidation.
- Following are YTD performance of various sectors.
Valuations
- As per Market cap to GDP basis, Indian markets are 104% of GDP and this is higher than the historical average 75% of GDP. However, it is still way below the global averages (US markets are currently trading at around 2x of GDP).
- As per price to book basis, the current market is trading at 3x of book value on 1 year forward basis (as per consensus estimates & Motilal Oswal). It is higher than the historical average of 2.6X.
- As per price to earnings basis, the current market is trading at ~20.5X of 1 year forward earnings (higher than historical average of 18x).
- Overall, due to the sharp rebound in the markets and the availability of massive liquidity, valuations are stretched in the short term.
| Quarter |
Reported PAT in ₹ Cr of NIFTY 500 Companies |
| Dec, 2019 |
1,22,235 |
| March, 2020 |
53,406 |
| June, 2020 |
32,400 |
|
Sept, 2020
|
1,72,786 |
| Dec, 2020 |
2,09,795 |
|
March, 2021
|
2,10,202 |
|
June, 2021 (233 Companies)
|
1,16,071 |
| Source: Bloomberg, ICICI Sec, Kotak MF |
-
Henceforth, the earnings will support a further upside. We have witnessed strong momentum in corporate earnings in previous 3 quarter of FY20-21. The same is being expected to continue for few more quarters to justify the valuations as per traditional valuation metrics. Lower corporate tax & lower interest rates, deleveraging of corporate balance sheet along with higher earnings growth must be kept in mind while assessing the valuations. Massive earnings growth will make the valuations comfortable in near term. Indian corporates have reported their highest ever quarterly profits in March 2021 quarter & following are reported PAT of past six quarters along with June 2021 Quarter with 233 companies reported & balance corporate results are yet to come.
Considerable pain in corporate profits (April-June quarter this year) was seen due to the second wave of Covid-19 prevailing most of the quarter. Hence, quarter on quarter performance was subdued till now as per reported numbers and year on year results are good which is primarily driven by lower base in previous year.
- Indian corporates have deleveraged their balance sheet which we have not seen before. Corporates in 15 sectors have reduced their debt to the tune of 20% in FY21.
- Current markets are hovering between “historical high valuation levels as per traditional metrics” as well as “the tailwind of strong earnings growth along with the expected global commodity cycle and massive liquidity”.
- With regard to global liquidity, US FED’s communication is now moving towards “when will the fresh liquidity stop / tapering start?” and it is more likely to start from year 2022 beginning onwards.
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 provide 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 the wealth over the long period.
- 4. We suggest you 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.
Indian markets were flat in July 2021 and consolidated their previous gains. Midcap and Small cap indices are outperforming the large cap index. Following are July 2021 performance of the indices.
| Index |
MoM Change % |
| SENSEX |
0.2% |
| NIFTY 50 |
0.1% |
| NIFTY MIDCAP 100 |
3.1% |
| NIFTY SMALLCAP 100 |
8.0% |
| NIFTY 500 |
1.4% |
Following are performance details of NIFTY 50, NIFTY Midcap 100, NIFTY Small cap 100 for 1-year, 3-year, 5-year, 10-year as on 31-July-2021. As you can see all the action has happened in the past year with the Nifty Small Cap leading the charge.
Inflation: Consumer Inflation rate in India was at 6.26% in June 2021 compared to 6.30% in May, 2021. A slowdown was seen in apparel, footwear and housing, while in contrast, inflation accelerated for food and fuel.
Brent crude went up marginally by 1.64% in July 2021 from $75.20 to $76.44 per barrel. Now, the demand outlook is subdued due to the spread of Covid-19 delta variant across the globe.
Indian currency remained flat in July 2021 and INR was ₹74.337 / USD in July 2021 (previously ₹74.36 per USD in June 2021).
FII Inflows: FIIs withdrew from Indian equities to the tune of ₹11308 Cr. Meanwhile, Domestic institutional investors poured money into Indian equities to the tune of ₹18394 Cr. Inflows from DIIs were strong in past 5 months consistently. Indians are believing in their own growth story and participating in the equities market.
India received the highest inflows from FPIs in the past year amongst all emerging markets.
Market Outlook
DEBT OUTLOOK
The 10-year benchmark yield settled at 6.20% on 31st July, 2021 against 6.05% on 30-June, 2021.
RBI’s actions helped to minimize the volatility in bond markets significantly which is very much necessary for Government to up the spending. In continuation to this, Govt has announced extra need for ₹1.58 trillion to pay states and it may put pressure on yield however, RBI is expected to manage it well through various monetary as well as liquidity tolls called GSAP, OMOs, OT etc. 10Year G-Sec is expected to trade between 6%-6.25% for next 3 months.
As of now, the general consensus is that the interest rates are expected to remain at current levels with continuation of accommodative stance to support the growth for near future.
CPI inflation is expected to normalize between 5%-5.75% in FY22.
RBI Governor has also recently mentioned that “hasty withdrawal of easy policy can undo the gains”. It further emphasises that the interest rate will continue to be at current levels minimum for near future.
Credit risk funds, Medium- & Long-term corporate bond funds are riskier, as there are chances of default which will cause capital loss or depreciation. Previous rating downgrades and subsequent default of interest payment as well as deferment of repayment by ILFS, Zee/Essel group, DHFL, YES bank, Lakshmi Vilas Bank (perpetual bonds) reiterates the same and we suggest our clients to stay away from investing in these debt funds.
Market Outlook
GOLD
Gold was seen trending down from August 2020 to March 2021 after a 10–12-month period of uptrend, gold prices have started rebounding from April, 2021 onwards. Gold prices made a bottom in March 2021 @ $1687 per ounce but as of July 2021, it had rebounded by 7.49% & settled at $1813 per ounce.
In past three months, there are positive news flows which support the gold price movement and following are few of them.
As per JP Morgan on 19-May-2021, “Big institutional investors are dumping Bitcoin and going back into Gold”
Russia intends to do fresh gold buying through its Sovereign Wealth Fund along with Euro, Yen and intends to reduce its dollar reserves.
Price movement of gold is sensitive to geo-political events, uncertain economic growth etc.
Along with this, dwindling gold supply and fall in new gold discoveries will drive the prices over the long periods. The larger trend of USD depreciation will stabilize gold price with an appreciation bias.
There should be allocation to gold in the portfolio to the extent of 5%-10%.
Market Outlook
EQUITY (Sectoral Performance)
In July 2021 – Metals and Mining, Soft commodities (Sugar) consolidated their leadership position for the third consecutive month. The rallying was massive till April 2021 and still attempting to rally further. We are yet to see the strength of the ongoing rally.
Midcap and Small cap IT (along with ER&D stocks) & Select Midcap Pharma, Specialty chemicals stocks continued their strength throughout the month and predominantly consolidated their gains.
Large cap IT stocks continued their move further up in July 2021 and a few undervalued large cap IT stocks (compared to TCS & Infosys) have also joined the uptrend (i.e., Tech Mahindra & HCL Tech).
Textiles, Paper, Plastic pipes, Cement are also among the sectoral leadership charts.
Banks and NBFCs attempt to rally in July, 2021 ended after 6 months of consolidation.
Following are YTD performance of various sectors.
Valuations
As per Market cap to GDP basis, Indian markets are 104% of GDP and this is higher than the historical average 75% of GDP. However, it is still way below the global averages (US markets are currently trading at around 2x of GDP).
As per price to book basis, the current market is trading at 3x of book value on 1 year forward basis (as per consensus estimates & Motilal Oswal). It is higher than the historical average of 2.6X.
As per price to earnings basis, the current market is trading at ~20.5X of 1 year forward earnings (higher than historical average of 18x).
Overall, due to the sharp rebound in the markets and the availability of massive liquidity, valuations are stretched in the short term.
| Quarter |
Reported PAT in ₹ Cr of NIFTY 500 Companies |
| Dec, 2019 |
1,22,235 |
| March, 2020 |
53,406 |
| June, 2020 |
32,400 |
|
Sept, 2020
|
1,72,786 |
| Dec, 2020 |
2,09,795 |
|
March, 2021
|
2,10,202 |
|
June, 2021 (233 Companies)
|
1,16,071 |
| Source: Bloomberg, ICICI Sec, Kotak MF |
Henceforth, the earnings will support a further upside. We have witnessed strong momentum in corporate earnings in previous 3 quarter of FY20-21. The same is being expected to continue for few more quarters to justify the valuations as per traditional valuation metrics. Lower corporate tax & lower interest rates, deleveraging of corporate balance sheet along with higher earnings growth must be kept in mind while assessing the valuations. Massive earnings growth will make the valuations comfortable in near term. Indian corporates have reported their highest ever quarterly profits in March 2021 quarter & following are reported PAT of past six quarters along with June 2021 Quarter with 233 companies reported & balance corporate results are yet to come.
Considerable pain in corporate profits (April-June quarter this year) was seen due to the second wave of Covid-19 prevailing most of the quarter. Hence, quarter on quarter performance was subdued till now as per reported numbers and year on year results are good which is primarily driven by lower base in previous year.
Indian corporates have deleveraged their balance sheet which we have not seen before. Corporates in 15 sectors have reduced their debt to the tune of 20% in FY21.
Current markets are hovering between “historical high valuation levels as per traditional metrics” as well as “the tailwind of strong earnings growth along with the expected global commodity cycle and massive liquidity”.
With regard to global liquidity, US FED’s communication is now moving towards “when will the fresh liquidity stop / tapering start?” and it is more likely to start from year 2022 beginning onwards.
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 provide 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 the wealth over the long period.
4. We suggest you 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.
