The loosening of monetary policy in China may be in stark contrast to what the rest of the global central banks are doing, but it is surely helping the metal stocks. PSU banks are finally seeing re-rating after a strong June 2022 quarter when these banks saw a sharp fall in gross NPAs and lower provisioning.
In the last few months, inflation has been the bugbear of macroeconomic policy. However, August saw some clear inflation relief, both in India and the US. The US consumer inflation fell sharply to 8.5%, although food inflation remains a worry. In India, the CPI inflation tapered but more importantly, there was a 270 bps tapering in WPI inflation which is positive news for the supply push inflation that has pushed up input costs.
FPI flows were the big story of August 2022. After net outflows of $33 billion for 9 months between October 2021 and June 2022, there was a turnaround in July 2022, albeit with marginal net inflows into equities at $618 million. August saw a change in fortunes as FPI inflows into equities surged more than 10-fold to $6.44 billion. With the rupee stabilizing around 80/$, the first signs of risk-on from FPIs was visible in August 2022.
In volatile August, Nifty ends with 3.5% gains
The Nifty returns at 3.5% in August 2022 were nowhere as impressive as 8.7% in July, but this is on a much higher base. Also, the month of August had several headwinds in the form of hawkishness of Fed, rate hikes by RBI, recession fears, concerns over the tone at Jackson Hole symposium, GDP growth etc. Here are some of the key factors that determined the market trend for August 2022.
a) Fears of recession once again took oil prices down in August. Brent crude dipped as low as $92/bbl before signals of supply cuts from the OPEC led to a bounce in price. The oil prices were in the range of $92/bbl to $105/bbl with a downward bias. For the last 2 months, oil has been in a comfort zone; both for the buyers and the sellers.
b) If the FPI flows turned around in July, it was decisively positive in August. With $6.44 billion of inflows into equity and close to $1 billion into debt, it looks like risk-on investing is back in vogue with the FPIs. A mix of solid macros, policy clarity, promise of stable GDP growth, sound Q1FY23 results and bottoming rupee helped FPI sentiments.
c) August 2022 was also the month when monetary policy boundaries were set, giving a lot of clarity to traders. Fed chair, Jerome Powell, underlined at Jackson Hole that Fed would not relent on rate hikes till inflation hit 2%. Now 3.75%-4.00% looks like the terminal target for the US markets. Of course, inflation will hold the key.
d) RBI hiked rates by another 50 bps in the August policy taking the rates a good 25 bps above the pre-COVID rate. Now, it looks like the terminal repo rates in India would be closer to 6.5%. However, the good news is that CPI inflation and WPI inflation have been retreating rapidly in India.
e) The Q1FY23 results season ended on a positive note. Total revenues across sectors were higher on a yoy basis and on sequential basis. Most of the profit pressure was driven by the negative marketing margins of oil marketing companies. Overall operating margins did take a hit. Top line growth also came from pricing advantage and not from volumes.
The headwinds are still there but August did see these challenges gradually waning as growth levers stayed robust despite an aggressive inflation control program.
Metals and banks again dominate the rally in August 2022
Here is a quick look at how the key sectors performed in August 2022. Out of the 10 sectors evaluated for August 2022, 8 out of the 10 sectors gave positive returns. While 6 sectors outperformed the Nifty, there were 4 sectors that gave lower returns than the Nifty. Among general indices, Nifty was up 3.50%, Mid Cap index up 6.23% and Small Cap up 4.91%.
Data Source: NSE
Unlike July 2022, when all the 10 sectors saw positive gains, only 8 sectors gave positive returns in August 2022. Metals were once again the star of August 2022, gaining 8.18%. While the toning down of the export taxes on metals has helped, the soft rate policy adopted by China has been a key factor. China continues to be the biggest driver of global metal prices. Even as the global central banks are tightening, the PBOC has been reducing rates to revive growth. That gave the much needed boost to metal stocks in August 2022.
August 2022, again, saw an impressive performance by the PSU banks and the private banks. While PSU banks gave 7.84% returns in August, private banks also gave an impressive 6.69%. This comes on top of double digit returns in July. While banks are expected to lead the recovery in GDP, the latest quarter results have shown clear improvement in banking profits due to lower provisioning and improved asset quality. Lower credit costs helped the private banks and even PSU banks to expand net interest margins (NIMs) in the quarter.
Among other sectors that did better than the Nifty were oil & gas at 6.58%, consumer durables at 6.39% and automobile at 5.37%. With oil prices stable, upstream stocks put up a strong performance. But, the enthusiasm on oil was largely on the back of big expectations that had been built up in Reliance Industries ahead of its 45th AGM. While Consumer durables were more of a defensive bet, auto stocks bounced back on better offtake numbers and amidst auto stocks gaining a much better hang of their supply chains.
IT and Pharma once again disappoint in August 2022
For the second month in succession, the IT index underperformed the Nifty. While the IT index returns were positive in July, the IT index ended up contracting by -2.55% in August. July had seen most of the IT companies facing margin pressures and higher attrition in Q1FY23. However, August was when the impact began to show. A slew of top IT companies including Infosys, TCS, Wipro and HCL Technologies either cut variable pay or held back variable pay. They did the same with employee bonuses too. Clearly, the IT sector was preparing for lower tech spending in the US and Europe and that did not go down well with the markets. Pharma also lost value in August on fears of higher competition and thinner margins in the US generics market.
August has seen a turnaround of sorts at a macro level. September would focus on how well the IT stocks are able to recover from their sentimental lows!