What led the Nifty bounce from the June lows?

22 Jul 2022 , 12:57 PM

Just a little over a month back, there was an overdose of pessimism in the markets. Inflation was still rampant; the central banks were getting ultra-hawkish and recession was staring in the face. That was when the markets literally went into a free fall. By the middle of June 2022, the Nifty had fallen almost 20% from the peak levels and the currency had fallen by another 6%. It was almost confirmed that India was in the midst of a bear market.

In the last one month several things have changed. Yes, inflation is still high and central banks are still hawkish. However, FPIs have turned net buyers in India and the markets appear to be increasingly convinced that a recession can be avoided. The benchmark indices have gained over 8.6% since the middle of June and the mid-cap indices have done a lot better. Before getting into the sectoral story, here is what the Nifty looked like.

Large cap and mid-cap indices since mid-June 2022

Here is the story of how the indices behaved from the lows of mid-June.

1. The benchmark Nifty-50 index has rallied from a mid-June low of 15,293.50 to a closing level of 16,605.25 on 21st July. That is an impressive 8.58% in a little over a month.
2. The representative MIDCAP-100 index rallied from a mid-June low of 25,292.90 to a closing level of 29,049.15 on 21st July. That is an impressive 14.85% in over a month.
3. The SMALLCAP-100 index has rallied from a mid-June low of 7,982.55 to a closing level of 9,094.90 on 21st July. That is an impressive 13.93% in a little over a month.

The positive takeaway from the returns numbers is that it is not just the large caps that have recovered, but there is also a lot of alpha hunting in small caps and mid-caps. A very representation data point is the sharp improvement in the advance/decline (A/D) ratio, which has consistently remained robust in the last few days.

Sectoral indices that outsmarted the Nifty from June lows

The Nifty is an average of the market. So, obviously there are going to be sectors that would have done better than the Nifty returns and sectors that did worse than the Nifty returns. Let us first focus on the sectors that did better than the Nifty returns since the lows of June 2022. These low dates range approximately between 17th and 22nd of June 2022.
 

Sectoral Index	Returns since June 2022 Lows
Automobile Index	+16.98%
Consumer Durables Index	+14.87%
NBFC Index	+10.31%
FMCG Index	+16.60%
Metals Index	+13.35%
Private Banks Index	+11.56%
PSU Banks Index	+20.01%
Realty Index	+18.14%

Data Source: NSE

In fact, several of the index heavyweights like private banks, FMCG and automobiles are in the list of sectors that have outperformed the Nifty overall. What has been the trigger? In the case of autos, it has clearly been a combination of easy availability of microchips, lower fuel prices, higher auto affordability and the big shift to EVs. Financials overall did well, although within the financials space, the insurance companies did come under pressure and did not fully participate in the rally of the last one month.

FMCG has been a major driver and it is hardly surprising. The industry is dominated by the big names and recent numbers of Hindustan Unilever and the AGM details of ITC indicate that big FMCG is handling the input cost syndrome quite well. Also, with input costs coming down rapidly and prices to follow only with a lag, the FMCG companies may enjoy a quarter of attractive profits and a revival in operating margins.

In the banking space, the PSU banks did a lot better than the private banks, although the PSU banking index has an overt dependence on SBI. Higher bond yields would mean banks can charge higher rates on loans and that would boost the net interest margins (NIMs). We could see the first indications in Q2FY23 results. Metals did see a bounce after the sharp fall, but in the light of the highly uncertain conditions in China, metals remain a question mark.

Sectoral indices that underperformed the Nifty from June lows

Of course, several sectors did not measure up to the Nifty returns. While the returns are still positive on a standalone basis, they were lower than the Nifty returns. Here are some of the sectors that did worse than the Nifty returns since the lows of June 2022.

Sectoral Index	Returns since June Lows
Healthcare Index	+8.42%
Information Technology	+6.02%
Oil & Gas Index	+8.48%
Pharmaceuticals Index	+7.18%

Data Source: NSE

IT sector really lagged the Nifty, if you consider from the lows of June. The reasons may predicate around the results of IT companies. HCL Tech and TCS saw pressure on margins and a spike in attrition. Wipro witnessed a sharp fall of -21% in net profits and Infosys results are only expected next week, although attrition is likely to be a big issue. The pharma space did not measure up to the Nifty due to concerns of tougher competition in generics the US and supply chain bottlenecks emerging. Healthcare, did relatively better.

The sector that was volatile was oil and gas and the returns were just a tad below that of the Nifty, if you look at the data from the lows of June 2022. There was a lot of damage over the windfall tax, although some of the losses were recovered after the government reduced the rates of windfall tax. The windfall tax hit two heavyweights in the hydrocarbons space viz. Reliance Industries and ONGC and that led to a neutral performance by the index.

Finally, keep an eye on the rupee
Even as we celebrate the sharp recovery in the Nifty from the June lows, the one big X-factor could be the rupee levels. Check the chart below.

Chart Source: Trading Economics

In the last few days, the FPI flows have turned positive since the rupee at 80/$ gives them a good currency entry point. However, the assumption is that the RBI will defend the rupee at around 80/$ levels with its $580 billion forex stash. If the RBI consciously permits the rupee to weaken, you can almost expect another bout of FPI selling. That can change the story of the stock markets quite rapidly!