Market Outlook for the month

Market Outlook for the month:

By Research desk

June 2024 Market Surge: A Stellar Month for Indian Equities

India’s stock markets experienced a robust performance in June 2024, primarily driven by the impressive gains in smaller companies. Notably, the Nifty Microcap 250 and Nifty Smallcap 250 indices achieved significant monthly growth rates of 11.56% and 7.90%, respectively. Over the past three months, the Nifty Microcap 250 has shown a growth of 21.51%, extending to 23.48% over six months, and a remarkable 75.24% over the past year.

In the April to June quarter of FY 2024-25, the Indian stock market’s capitalization surged by 13.8%, the highest increase among the top 10 global stock markets. This upward trajectory has been consistent throughout 2024, with the market reaching multiple record highs and continuing the rally that started in the previous year. Over the past three years, frontline indices have maintained steady growth, largely fueled by the active participation of Indian retail investors.

The influx of retail investments since the pandemic has significantly altered the ownership landscape of the market. The combined stake of domestic institutional and retail investors in the free-float market has increased to 62.9% as of March 2024, up from 55.1% in March 2014 and 58.7% in March 2019. Additionally, non-institutional investors have come to dominate cash volumes, accounting for over half in FY24, a notable rise from 38% in FY14 and 49% in FY19.

India’s growing influence in global markets is also evident, with its weight in the MSCI Index increasing to 19%, up from 7% in FY14 and 9% in FY19. This robust performance in June 2024, underpinned by the growth of smaller companies and strong retail investor participation, highlights the resilience and potential of the Indian equity market.

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Sectoral performance

In June 2024, The IT sector led with impressive 11.72% returns due to the strong US dollar, while Consumer Durables, Realty, and Auto sectors also performed well, contributing significantly to the overall market gains in June.

In the following sections, we provide a comprehensive examination and detailed insights of some major sectors:

Auto:

In June 2024, the automobile industry experienced a slight year-on-year increase in retail sales by 0.7%, totaling 18.9 lakh units. Two-wheeler sales rose by 4.7% YoY to approximately 13.8 lakh units, whereas car sales saw a decline of 6.7% YoY, reaching 2.8 lakh units.

Despite the overall decline in most segments, two-wheeler and three-wheeler sales recorded growth. The two-wheeler segment showed a modest increase, partly hindered by the extreme heatwave across India which reduced foot traffic at dealerships. However, with the early arrival of the southwest monsoon, sales are expected to improve in the second quarter of FY25.

Passenger vehicle sales declined by 6.7% YoY due to high discounting, oversupply, and selective financing primarily targeting high-end customers. The introduction of new models and ongoing sales promotions are anticipated to support future growth.

Commercial vehicle sales dropped by 4.7% YoY, influenced by a high base from the previous year, election-related impacts, discount pressures, and high interest rates. However, rising mining activity, favorable rainfall expectations, and improved inventory levels are expected to drive demand recovery.

Three-wheeler sales increased by 5.2% YoY, driven by higher sales of electric three-wheelers, attractive offers, and first-time buyers. The introduction of new models and continued sales promotions are expected to bolster future growth.

Auto ancillary revenues are projected to grow by 11.2% YoY, supported by double-digit growth in two-wheeler OEMs and increased component orders. The frequent replacement of tires during summer, the onset of the festive season, mix improvements, recovery in rural demand, and infrastructure development activities are likely to benefit the overall industry. However, rising input costs, increased discounting to boost sales, and adverse policy changes could pose challenges to profitability and growth within the sector.

IT:

Nifty IT stocks faced corrections in Q3-Q4 FY24 due to reduced discretionary spending and delayed deal decisions. However, Q1FY25 is expected to show slight improvement with emerging growth signs driven by AI, consulting, ER&D, healthcare, and BFSI sectors. EBIT margins are anticipated to stabilize with seasonal factors and wage revisions. While Q1FY25 may see moderated growth due to weaker discretionary spending, non-discretionary sectors are expected to improve. Industries like BFSI, Manufacturing, Telecom, Retail, and Hi-tech are likely to recover, supported by new deal activities. The IT sector’s medium to long-term outlook remains positive, anticipating a stronger recovery in H2FY25 with increased demand for AI, Machine Learning, Cloud Transformation, and Digital Transformations. Monitoring factors include management commentary on spending, deal cycle normalization, campus hiring trends, progress in AI projects, and deal conversion to revenue. Declining attrition rates are beneficial for margins, while any Q1FY25 disappointments could impact Q2FY25 and IT valuations.

Banking: 

The banking sector continues to witness robust systemic credit growth, nearing multi-year highs with approximately 19% YoY growth, driven significantly by retail and SME segments, while corporate lending shows signs of gradual recovery. Banks, including Small Finance Banks (SFBs), are expected to maintain strong credit growth of about 18.3% YoY/QoQ. Deposit growth has moderated to around 12.6% YoY, influenced partly by seasonal trends typically seen in Q1. Despite this, most banks have managed to maintain or slightly improve their Credit-Deposit (C-D) ratios sequentially.

Looking ahead, banks foresee continued demand-led growth in FY25, contingent upon adequate deposit growth to support expanding credit portfolios. While CASA deposits pose challenges, term deposits are driving overall deposit growth. Net Interest Margins (NIM) are anticipated to contract by 5-10bps, with PSU banks likely to report lower operating expenses following recent wage settlements.

Profit before provision and taxes is projected to grow by 5% YoY, with a slight decline of approximately 4% QoQ. Asset quality metrics are expected to remain stable, despite seasonal increases in loan slippages. Market attention will focus on discussions regarding stress in the microfinance segment, particularly for SFBs and banks heavily involved in this sector. Credit costs are expected to remain manageable, supporting overall earnings momentum at a moderated pace.

Chemicals:

In June 2024, a majority of chemicals saw price increases on a month-over-month basis. Concurrently, Brent crude prices rose significantly by approximately 12%, reaching around $88 from $78. Looking ahead, there is an anticipated recovery in demand from the agrochemical sector starting H2FY25, alongside pockets of growth in select therapies within the pharmaceutical sector.

The trajectory of demand recovery in the agrochemical sector remains a critical factor to monitor, with expectations set for gradual improvement throughout FY25. Companies positioned higher on the value chain, focusing on scale and complexity, are poised to benefit in the long term. Conversely, the commodity chemicals segment may experience range-bound conditions due to stable domestic demand, although pricing pressure from Chinese competitors is expected to persist, particularly in commodity chemical markets.

Companies that emphasize value-added products and enhance their scale and complexity are likely to outperform those solely reliant on commodity plays over the long term. This strategic positioning underscores a shift towards higher value propositions amidst competitive market dynamics.

Important events & updates

A few important events of the last month and upcoming ones are as below:

1. In June 2024, the HSBC India Composite PMI stood at 60.9, consistent with the flash data and showing an acceleration from May’s five-month low of 60.5. This marked the 35th consecutive month of expansion in private sector activity, with the latest figure notably surpassing the long-run average. The growth was driven by strong output from both the manufacturing and service sectors.
2. In June 2024, the HSBC India Manufacturing PMI rose to 58.3, up from May’s 57.5 but slightly below both preliminary estimates and market forecasts of 58.5. This latest reading indicated a robust improvement in business conditions, driven by strong demand that fueled expansions in new orders, output, and purchasing activity.
3. Deposit growth in India as of June 2024 was reported at 12.6%.
4. Infrastructure output in India increased by 6.3% year-on-year in May 2024, up from 6.2% reported in the previous month.
5. In June 2024, the HSBC India Services PMI was revised upward to 60.5 from the initial flash reading of 60.4. This marked a slight acceleration from May’s five-month low of 60.2, although it fell just short of forecasts which anticipated 60.6. It was the 35th consecutive month of growth in services activity, driven by a faster increase in new orders, including an unprecedented expansion in foreign sales.
6. The second half of the year’s budget is expected to be released on July 23rd.

Fundamental outlook: 

India’s economic fundamentals in mid-2024 reveal resilience and growth potential. The surge in electricity demand, up 9% in June 2024 due to prolonged heat and delayed monsoons, underscores strong consumer activity despite weather challenges. Digital transactions through UPI reached record highs in May 2024, reflecting accelerated digital adoption and a shift towards a cashless economy. The Services PMI, rising to 60.5 in June, indicates sustained robustness in domestic and international demand, bolstering business confidence. GST revenues maintained growth, surpassing 1.74 Lakh Crores with an 8% YoY increase, showcasing effective tax administration and fiscal stability. Forex reserves hit an all-time high in June, surpassing $651.5 billion, fortifying India’s economic buffers against global uncertainties. The projected market borrowing of approximately 11.75 Lakh Crores for FY25 received positive market reception, indicating confidence in government infrastructure initiatives and fiscal management. The RBI’s decision to maintain the policy rate at 6.5% highlights a balanced approach to support growth while managing inflationary pressures. The upward revision of FY25 GDP forecast to 7.2% reflects optimism driven by robust manufacturing, construction recovery, and rural resilience.

Technical outlook.

From a technical perspective, the Indian market in mid-2024 responds favorably to the projected FY25 market borrowing, suggesting investor confidence in economic expansion plans. Bond markets anticipate a flattening yield curve for FY25, with shorter-end yields expected to rise relative to the higher end, amidst cautious optimism influenced by global economic trends. Despite recent USD strength from mid-June onwards, driven by US economic data and Federal Reserve policy expectations, the Indian Rupee has maintained relative stability.  Continued USD strength leading up to the US elections in November 2024 poses challenges but also opportunities for currency management and export competitiveness in the global market. Overall, India’s economic outlook remains promising with proactive policies and robust fundamentals supporting growth across sectors amidst evolving global dynamics.

The primary support level for the Indian market stands at 24000, with a major resistance at 23500. Conversely, the primary resistance level is at 24750, with a major resistance at 24,900.

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Outlook for the Global Market

US Market:

Looking ahead, the US economic outlook for mid-2024 remains cautiously optimistic despite challenges. Growth has consistently surpassed expectations, supported by strong consumer spending driven by improvements in the labor market and stable business and government expenditure. Although GDP growth moderated in the first quarter, policymakers have successfully averted a recession while bringing inflation closer to target levels around 2%. Real consumer spending, fueled by reduced savings from the pandemic and increased borrowing, has exceeded forecasts, though sustainability remains a concern amid elevated interest rates and inflation.

Looking forward, interest rate cuts later in the year may bolster consumer spending by enabling households to take on more debt. However, the labor market, which showed robust growth in early 2024, is now experiencing a slowdown, with employment stabilizing above pre-pandemic levels as of April 2024. The labor force participation rate, while stable recently, is expected to decline in the second quarter, reflecting broader economic adjustments. Over the longer term, demographic shifts will increasingly shape labor supply dynamics, influencing future economic trajectories and policy considerations.

Eurozone:

Inflation is expected to drop below 2% in 2024, aided by lower energy prices. Trade growth remains sluggish, influenced by past challenges and the ongoing impact of the Red Sea crisis. Despite these factors, the economy showed signs of recovery in early 2024, with GDP increasing by 0.3% in Q1 driven by exports, consumption, and construction. The labor market remains resilient with low unemployment rates, supporting wage growth above consumer price increases. While job vacancies remain high, households are yet to fully benefit from lower gas prices, which should become more apparent by year-end as retail tariffs adjust to wholesale market shifts.

Outlook for Gold

Gold has shown strong performance in 2024, outperforming major asset classes. This growth has been supported by central bank purchases, Asian investment flows, and geopolitical uncertainties. Looking ahead, the key question is whether this momentum can be sustained amid global economic uncertainty and expectations of rate cuts in developed markets. The recent rally has pushed gold prices above $2425/oz, driven by anticipated rate cuts, geopolitical tensions, and investor demand for safe-haven assets amidst volatile equity markets. Gold’s inverse relationship with bond yields suggests potential for continued price strength. Given these factors, gold is poised to remain a preferred asset in 2024, offering a hedge against market risks.

What should Investors do?

The Indian economy enters the second half of 2024 with robust fundamentals bolstered by strong domestic demand, resilient fiscal management, and optimistic growth projections. Despite persistent challenges like inflation and external economic dynamics, proactive monetary policy and fiscal measures are expected to sustain economic momentum and support long-term growth prospects.

Considering recent market trends and economic indicators, we recommend a cautious approach for investors in the Indian market. Much of the recent positive sentiment has already been priced in, driven by strong macroeconomic developments, pre-Budget cues, and expectations of robust Q1FY25 earnings. The progression of the monsoon, direction of bond yields, oil prices, and fund flows will likely influence market dynamics, with sector rotations expected to play a pivotal role in generating returns.

Given the recent outperformance of Midcaps and Smallcaps, which have narrowed the valuation gap with Largecaps, we advise maintaining a diversified portfolio with a bias towards quality Largecap stocks. This strategy can help mitigate risks associated with potential corrections in specific market segments while capitalizing on opportunities presented by fundamentally strong companies.It’s prudent for investors to have proper asset allocation based on your risk profile and gradually accumulate positions in high-quality stocks. This approach aligns with current market conditions, offering flexibility to navigate uncertainties and maintain a balanced portfolio amidst evolving economic trends and market volatility.

Disclaimer:

This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.

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