Central bank hawkishness continued in the month of July 2022. In the last 4 months between March and July, the Fed hiked rates by 225 basis points of which 150 bps hike happened in June and July alone. The RBI was also not too far behind. It has hiked repo rates by 90 bps since May 2022 and CRR by 50 basis points. The RBI is all set for another rate hike when it meets in early August. Central bank hawkishness has been the big story.
The US inflation for June touched a multi-decade high of 9.6% making aggressive rate hikes almost inevitable. Inflation in India has tapered but WPI inflation continues to be elevated above the 15% mark. The real worry that spooked markets in the last few months is that the enthusiasm of central banks to tighten could result in a recession. This could have a huge impact on industrial and GDP growth. That is already evident in IMF estimates.
The good news for the Indian markets came from FPI flows. After nearly $30 billion of equities got sold in the first 6 months of 2022, July saw net inflows of $618 million into equities. Of course, the inflow looks paltry compared to the extent of outflows, but the good news is that the undertone appears to have changed. We await confirmation from August data. However, if the rupee settles beyond 80/$, there is the risk of imported inflation, with negative implications for markets.
Nifty gains 8.73% in a difficult July 2022
In a sense the change in tone of the markets was visible in the first half of the month itself. However, the real thrust to the markets came in the second half of the month with the Nifty closing with gains of 8.7% in July after four consecutive months of negative returns on the Nifty. The buying was seen across sectors like banking, financials, FMCG and metals. Even IT and Oil stocks saw a late recovery in July 2022.
Here is what triggered the sharp rally in July.
a) Recession, or let us call it the fear of recession, has many negative ramifications. However, one positive ramification that it had for Indian markets is the easing of oil prices. Crude which had touched a high of $132/bbl just a couple of months back, dipped below $100/bbl, albeit briefly. Through the month, the price of Brent crude stayed subdued in the range of $103/bbl to $107/bbl, giving much needed respite.
b) You can almost call it a turnaround in the FPI sentiments during July 2022. From net selling equities of nearly $30 billion in the first six months of 2022, FPIs have been net buyers of $618 million in equities in the month of July. The figure is small, but it is an indication that foreign investors are not being risk-off any longer.
c) Towards the end of July, the Fed hiked rates by 75 bps after hiking by 75 bps earlier in June also. Now Fed has hiked rates by 225 bps since March 2022, taking the Fed rates to the neutral levels. What this means is that any rate hike above this level would have a proportionate negative impact on GDP growth. The dot plot chart is pencilling the Fed to hike rates by another 100 to 125 basis points by end of 2022.
d) There was no let-up in US inflation, although the Indian CPI inflation did show some respite. US inflation was at a high of 9.6% while Indian inflation veered towards 7%. However, the WPI inflation above 15% hints at intense supply chain pressures on the Indian economy.
The first quarter results have just started to come out and the early indications are that margin pressures are still a reality across most of the key infrastructure sectors. However select sectors like FMCG have handled these margin pressures a lot better. Also, the top line growth continues to be robust across most of the sectors.
All sectors positive but metals, banks and consumer stocks shine
Here is a quick look at how the key sectors performed in July 2022. Out of the 10 sectors evaluated for July 2022, all 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 8.73%, Mid Cap index up 12.03% and Small Cap up 8.60%.
Data Source: NSE
All sectors gave positive returns in the month of July 2022, so our focus would be more on the star sectors that did better than the benchmark Nifty. Metals were the star of July gaining 17.7%. Apart from toning down the export taxes on metals, hopes of a revival in China also helped. Realty gained 17.04% on robust home sales reports. But the big news came from the banks and the consumer stocks in July 2022.
While PSU banks gave 14.38% returns in July, private banks also gave an impressive 13.90%. Early results for the first quarter indicate a clear improvement in profits due to lower provisioning in the quarter and improved asset quality. Lower credit costs also helped the private banks expand their net interest margins (NIMs) in the quarter.
Among the consumer stocks, both consumer durables and FMCG did much better than the Nifty with returns of 13.16% and 12.80% respectively. Both these sectors saw strong pricing power, growth in top line, better volumes on a sequential basis and an overall pick-up in rural and institutional sales. FMCG companies, especially the blue-chip majors, managed their product mix better to improve margins.
IT, oil and pharma did not measure up to the Nifty
The IT industry has been a pressure point for the last few months. The pressure this month came after TCS, HCL Tech, Wipro and Infosys reported weak margins and elevated levels of attrition. Manpower cost is becoming a big challenge. Oil stocks were also subdued but picked up steam in the second half after the government toned down the windfall gains tax. However, the downstream oil companies showed pressure in quarterly numbers due to the squeeze on marketing margins. In the pharma space, there was a lot of pressure on the healthcare stocks, especially the hospitals and diagnostic labs.
July 2022 has given some hope after a rather difficult and challenging 2022. Markets have weathered FPI selling manfully. It remains to be seen if they can weather the macro storm.