March 2024 was an interesting month where in the first half, there was a sharp correction with Nifty 50 falling to 21700 but correcting nicely to 22500 in the latter half and that has continued in the first week of April 2024 also. Even more dramatic were movements in Nifty Midcap 100, which is now above the 50000 level while Nifty Smallcap 100 recovered to 16022 on April 5, about a 12% rise from its level of 14295 on March 13, 2024. Indian 10-year bond yields have been stable in a narrow range at 7.12%, while USD/INR is at 83.29.
One of the reasons for this upmove is the pre-election rally, the first part of which happened after the state election results. India’s general elections will be held over almost seven weeks from April 19 to June 1. Results will be announced on June 4. It is widely expected that the ruling party will retain power. Prime Minister Mr Modi has repeatedly talked about major transformational initiatives during his 3rd term for long-term sustained economic growth and there is a lot of speculation about what initiatives will be announced during the first 100 days of the likely next term.
The second important reason is healthy flows from abroad, in addition to domestic flows resulting from a strong ongoing trend of financialization of savings. India has emerged as the second busiest market in the world for equity capital market (ECM) deals after the United States. Indian companies raised $2.3 billion in the first quarter of 2024 in IPOs, up more than 12 times the $166.5 million raised in the same period last year. Among the large deals in the pipeline, the listing of South Korean automaker Hyundai Motor’s India unit is on track to be the country’s largest-ever IPO as it aims to raise $3 billion in 2024 in a deal that would value the carmaker at up to $30 billion. The National Stock Exchange, the country’s largest bourse, was the third most active listing venue globally in the first quarter, behind the New York Stock Exchange and Nasdaq.
The Reserve Bank of India (RBI) Governor Shaktikanta Das on April 5, Friday announced the first monetary policy of the financial year 2024-25. The RBI decided to keep the key policy repo rate unchanged at 6.5% for the seventh consecutive time. The six-member MPC headed by Governor Das also decided to maintain the policy stance at ‘withdrawal of accommodation’. The RBI has projected India’s real GDP growth rate for FY25 at a healthy 7% combined with falling CPI inflation for FY25 at 4.5%. Healthy economic growth with falling inflation is a very favourable scenario.
Global markets are also putting up an impressive performance. The U.S. stock market is off to a soaring start in 2024, as optimism over the economy and interest rate cuts, combined with exuberance about the business opportunity in artificial intelligence, has stirred up the equity market. The S&P 500 has climbed more than 10% so far this year to post its biggest first-quarter gain since 2019. It is now at 5204, up from 4740 at the beginning of 2024. The tech-heavy Nasdaq Composite also registered its first record high since November 2021 in late February.
USA March non-farm payroll number announced on April 5 was significantly stronger than expected, raising more questions about the Fed’s ability to cut rates three times this year. The US economy saw 303K jobs added in March, well above the 200K forecast and up from the downwardly revised 270 K in February. Meanwhile, the unemployment rate unexpectedly ticked up to 3.8%, down from 3.9%, and average hourly earnings rose 0.3%, up from 0.2%. The strong jobs report suggests that the Fed can be patient, keeping interest rates high for longer, the market has moved the first rate cut expectation to September 2024 rather than July 2024.
Stocks have been able to defy a rise in 10-year Treasury yields, which are now close to 4.4% as compared to 3.9% at the beginning of 2024. This is primarily because of confidence from investors that the economy is set for a “soft landing”, in which inflation moderates but the economy avoids a severe downturn. Nearly two-thirds of fund managers see a soft landing as the most likely outcome for the economy in the next 12 months, while only 11% projected a “hard landing”.
Similar to last month, India continues to show impressive GDP growth, controlled inflation, sustained increase in corporate earnings of around 15%, and a very sound external sector with FX reserves rising to 646 billion USD, therefore, our bullish market view remains intact. Indian stock market volatility index VIX is at a low of 11.5, indicating less uncertainty and a reduced need for portfolio insurance. The long-term economic progress in India and the equity uptrend are likely to continue, though with episodic corrections. FII flows are undoubtedly volatile but domestic flows remain resilient and are increasing.
Overall, for the medium-term goals (anything above 3 years), allocation to equities should remain on the higher side. Fresh money could be invested in tranches, utilizing the STP route- systematic transfer plan. Equity mutual fund schemes remain the preferred way to express interest in stocks, because of the broad-based market and rapid rotation across sectors and caps. Consequently, selected schemes should belong to categories, that allow easy movement from one cap to another, and a few examples are Large & Midcap, Multicap, Flexicap, and Focus. Also fund managers, who identify the right sectors quickly, should be selected, one helpful pointer is the percentage of schemes, managed by them, which are in the top quartile during the last 2 years.
Also as always, with the global uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies. Similarly, for short-term goals, equities because of their volatile nature, should not be deployed. Equity savings schemes, balanced advantage schemes, because of their hybrid nature, or multi-asset funds may be utilized for goals with a time horizon of 2-3 years. An additional advantage of these schemes over traditional bank deposits is the much lower equity taxation which these schemes enjoy. Portfolio construction should be sequential in the order of liquidity, safety, and yield-enhancing components.
