If July and August were the months of hope and optimism, September 2022 was the month that the markets were mugged by hard reality. After heady FPI inflows in August, the FPI sentiments turned back once again in September as FPIs moved from being net buyers to being net sellers. Towards the end of September, the FPIs had sold equities worth over $900 million, despite being net buyers for the first 3 weeks. Nearly $2.3 billion of equities got net sold by FPIs in the last 8 trading sessions of September 2022.
Not surprisingly, the Nifty ended the month with negative returns. The Nifty fall of -2.56% may not appear to be really bad after 2 successive months of rise. However, the fall got accentuated after the Fed announced a 75 bps rate hike. If on one looks at the sectoral mix, it is the rate sensitives like realty and automobiles that took the biggest hit during the month. Apart from the rates; sticky inflation, recession fears and a consistently falling rupee are not really helping matters.
Nifty closes 2.56% lower in September 2022
The Nifty returns of -2.56% in September 2022 may appear disappointing compared to +3.5% in August 2022 and an impressive +8.7% in July. However, there were several headwinds in September. The Fed was relentless in its hawkish mission, US growth dipped into negative for the second quarter in succession and India’s high frequency data was hinting at pressure on growth. Here are some of the key factors that determined the market trend for September 2022.
Fed hawkishness remained the biggest issue. September was the third successive Fed meet where the rates had been hiked by 75 basis points and the Fed showed no signs of relenting. Powell continues to hold on to his “inflation control at any cost” argument. Not only is Fed ready for higher terminal rates, but it is also willing to heavily front load.
FPI flows were the big challenge in September. The month of August 2022 had seen a sharp turn in sentiments with FPIs infusing $6.44 billion into Indian equities. After a promising start in September, the month closed with net FPI selling of $903 million. Also, with Indian bonds unlikely to be included in global indices in 2022, the bond markets could also see a sell-off in the next few weeks.
The second quarter results start from the second week of October, and early signals are that sectors like cement, metals and IT may face pressure on the top line, apart from margin pressures. That is also making the FPIs somewhat wary of Indian equities.
Growth is the other big variable that FPIs are worried about. The US GDP for June 2022 quarter contracted -0.9% after contracting -1.6% in the March quarter. The Fed hawkishness may not be pulling down inflation, but it is surely pulling down growth. As the slowdown takes deeper roots in the US, UK and EU, the markets expect India to be negatively impacted by lower export demand and lower spending.
In terms of India’s monetary policy response, RBI hiked rates by another 50 bps, taking the total rate hike to 190 basis points since May 2022. That is likely to see a transmission into consumer and industrial loans. Also, the spike in cost of funds would have anyways depressed valuation estimates, which is yet to be factored in.
September represents a very delicate moment of flux in stock market sentiments. How the macros pan out in the next few weeks and how monetary policy reacts to it; would hold the key to the direction of the markets from here on.
September 2022 belonged to the defensive sectors
Here is a quick look at how the key sectors performed in September 2022. Out of the sectors evaluated for September 2022, 8 out of the 10 sectors gave negative returns, a classic example of negative bias. While 6 sectors outperformed the Nifty, there were 4 sectors that gave lower returns than the Nifty. Among general indices, Nifty was down -2.56%, Mid Cap index down -2.69% and Small Cap down -1.99%. The fall was across the board.
Data Source: NSE
In July, all the 10 sectors saw positive gains, while 8 out of 10 sectors gave positive returns in August 2022. In September only 2 defensive sectors viz. Pharmaceuticals and FMCG gave positive returns. While Pharma gave 3.32% for the month, FMCG index was up 2.09%. In the case of pharma, the rally was more on the back of dollar strength since much of pharma revenues still comes from the US. The dollar strength more than offset concerns over thinning of generic margins in the US amidst rising competition pressures.
The other major sector to outperform was the FMCG sector where there was a lot of defensive buying seen. Most FMCG plays in India are domestic plays on domestic purchasing power. That does not seem to have been really impacted if one looks at the top line of these FMCG companies. The other sectors that gave negative returns in the month of September but still did better than the Nifty include consumer durables, PSU banks, Private banks and metals. While metals have been a play on Chinese spending hopes, consumer durables was again a defensive play. In the case of banks, the higher rates are expected to be positive since the cost of funds is expected to rise slower than the yield on assets of the banks.
IT, oil and rate sensitives were disappointments in September 2022
While the banks were largely spared the impact of rate hikes, the rate sensitive sectors like autos and realty took it on their chin with negative returns of -4.27% and -9.44% respectively. Oil & Gas stocks suffered on sharply lower crude prices, which hovered below $90/bbl in the Brent market for a better part of the month. That hit most of the upstream and downstream oil stocks. The big disappointment, once again, was the IT sector. While strong dollar is a positive, the bigger concern is that a global recession would hit tech spending. That is likely to hit top lines of IT companies in the coming quarters.
If August was the month of hope, September 2022 was a hard return to reality. It was a reminder that the world economy is still in turmoil and the troubles are not going away any time soon.