Welcome to the ‘Everything Rally’
Investors have been riding what can best be described as an “everything rally”. Not only have U.S. and Indian stocks soared to new highs, but other asset classes like Cryptocurrency and Gold have also climbed to fresh records.
A tally of investment gains in the past 12 months (1st July 2023 to 30th June 2024):
Cryptocurrency:
Bitcoin: 86%
Ethereum: 60%
Equities:
United States:
S&P 500: 26%
NASDAQ 100: 36%
India:
NSE 500: 38.7%
BSE Mid Smallcap 400 index: 60%
Japan’s Nikkei 225: 27%
Metals
Gold: 23%
Silver: 28%
What Caused the Everything Rally?
Diminishing Recession Fears
Initial concerns about a looming recession in 2023 gradually alleviated as economic indicators displayed resilience.
Strong performance in the tech sector and positive corporate earnings shifted market sentiment, dispelling recessionary apprehensions.
Approval of Bitcoin and Ethereum ETF by the SEC
Regulatory approval of major cryptocurrencies like Bitcoin and Ethereum provided a boost to the market and led to huge inflows into crypto ETFs
Expectation of Future Rate Cuts
Risky assets performed better with the expectation of future rate cuts by central banks.
Rise of AI
US tech companies experienced record earnings, leading to a rally in AI-related stocks.
Strong Domestic Growth in India
India’s strong domestic growth contributed to positive market sentiments in India (backed by record inflows into equities).
Quick Action by the FED
The Federal Reserve’s swift response to a series of bank failures in the US stabilized the market.
High Liquidity
A significant amount of money ($6.15 trillion) is invested in money markets, which is expected to eventually flow into risk assets.
Shift of Money from Emerging Markets
Capital moved from emerging markets to developed markets like the US, Germany, and Japan, boosting their markets.
Record Gold Buying by Chinese Central Banks
Chinese central banks’ record purchases of gold have influenced global market dynamics and added to the rally in the precious metal.
Quote of the month
It is not hard to make money in market. What is hard to avoid is the alluring temptation to throw your money away on short, get rich quick speculative binges. It is an obvious lesson, but one frequently ignored.
– Burton Malkiel
“India can be third pillar of growth with US, UK”: TCS CEO K Krithivasan
“India to remain fastest-growing among largest economies”: World Bank
“India To Become A Superpower By 2047”: Financial Times’ Top Commentator Martin Wolf
Economic Indicators Overview:
Manufacturing PMI: India’s Manufacturing Purchasing Managers’ Index (PMI) rose to a two-month high of 58.3 in June 2024, up from 57.5 in May 2024. This marks the 35th consecutive month in the expansion zone, driven by accelerated manufacturing employment and improved new order intakes.
Services PMI: The headline Purchasing Managers’ Index (PMI) for services, released by HSBC on Wednesday, increased to 60.5 in June from 60.2 in May. It has remained above the 50-mark, which separates growth from contraction, for nearly three years.
GST Collection: Gross GST collections reached INR 1.74 trillion in June 2024, a year-on-year increase of 7.7%. This marks the slowest growth in three years but represents the 28th consecutive month of collections exceeding INR 1.4 trillion.
Core Sector Production: The index of eight core sector industries decelerated year-on-year to 6.3% in May 2024, down from a 6.7% increase in April 2024.
Industrial Production: Factory output growth, measured by the Index of Industrial Production (IIP), moderated to 5% in April 2024, compared to a 5.4% year-on-year increase in March 2024. This was driven by positive but slowing growth in the mining, manufacturing, and electricity sectors.
Credit Growth: Scheduled Commercial Bank credit growth reached 19.16% year-on-year as of June 14, 2024, compared to 15.42% year-on-year growth observed on June 16, 2023.
Equity Market Overview:
The BSE SENSEX (+6.9%) rose in June 2024, in line with the NSE NIFTY index. The BSE Mid-cap and Small-cap indices outperformed the BSE SENSEX, with growths of +7.7% and +10.3% respectively.
Sector Performance: Sector-wise, Infotech, Teck, and Realty were the top three performers over the month of June 2024, clocking +11.3%, +9.5%, and +8.2% respectively.
Net Foreign Institutional Investors (FII) Flows: Net Foreign Institutional Investors (FII) flows into equities reversed to turn positive for June 2024 (+$2.91 Bn), following -$3.02 Bn in May 2024.
Domestic Institutional Investors (DIIs): Domestic Institutional Investors (DIIs) remained net buyers of Indian equities (+$3.42 Bn), down from +$6.68 Bn in the previous month.
In CY2024, Net Foreign Institutional Investors (FII) flows stood at +$0.14 Bn, while net Domestic Institutional Investors (DII) investments in the cash markets stood at +$28.48 Bn, outpacing Foreign Institutional Investors (FII) investments.
Fixed Income:
June 2024 saw a shift in the monetary policies of some advanced economy central banks. The European Central Bank (ECB) led the way by beginning a rate cut cycle, while the Bank of England (BoE) indicated that it might start in August. However, further moves from these central banks are likely to be data-dependent and smaller than initially expected. Despite recent downside data in the US, the Federal Reserve is waiting for more conclusive data before starting a rate cut cycle, opting to stay on hold during the June 2024 meeting.
Indian Fixed Income Market – Future Outlook:
The initiation of a rate cut cycle by some advanced economies, coupled with muted economic data from the US, may raise hopes of a global monetary policy shift in the coming quarters.
Key events to watch include:
The upcoming budget, focusing on the path of fiscal consolidation and the quality of expenditure patterns.
Foreign Portfolio Investor (FPI) flows following bond inclusion.
While inflation has been trending downwards in recent months and is expected to ease further in FY25, factors such as the evolving food trajectory driven by the monsoon, strong domestic growth, high oil prices, and global geopolitical uncertainty have led the RBI to hold its stance.
Going forward, the size and timing of the RBI’s rate cut cycle may be influenced by the evolving domestic inflation outlook and the actions of global policymakers. We anticipate the RBI to cut rates in the second half (October/December) of FY25.
Liquidity:
Banking system liquidity eased during the month, averaging -₹50 billion compared to May 2024’s average of -₹1.5 billion, due to government spending, lower T-bill issuances, and reduced cash requirements. Government balances remained robust, averaging around ₹4 trillion (up from ₹3.7 trillion in May 2024). Core liquidity (system liquidity + government balances) stood at approximately ₹3.5 trillion by the end of June, compared to ₹3.6 trillion by the end of May.
Events to Watch in July 2024:
Union Budget: The Union Budget will be presented in the latter half of July 2024. Earlier this year, the finance minister presented the interim budget in February 2024. The upcoming budget is expected to address some demand-side concerns to improve the overall household situation. The tone and allocation of the budget will be closely monitored by the markets.
Monsoon: As of June 28, 2024, cumulative rainfall was 14.5% below the long-term average (LPA), while weekly rainfall was 8.3% above the LPA. Cumulatively, rainfall was above normal in southern India but deficient in other parts of the country. Out of the 36 sub-divisions, four have received scanty rainfall, 14 have received deficient rainfall, 11 have received normal rainfall, and seven have received excess rainfall.
Earnings Season: Indian companies will report earnings for Q1FY25/Q2CY24 from the beginning of July 2024 until mid-August. The earnings outlook remains buoyant amidst stable economic growth and the anticipation of the upcoming Union Budget.
Oil Prices: Oil demand and rising tensions in the Middle East have kept crude prices elevated. The Organization of the Petroleum Exporting Countries (OPEC+) cuts have also contributed to this. Oil prices remain a key factor to watch for the markets.
Looking Ahead:
India appears well-positioned with several strong macroeconomic indicators, with real GDP growth surpassing expectations in FY24. The economy has shown remarkable resilience, including robust Gross Value Added (GVA) growth, manageable trade and fiscal deficits, inflation around 5% as of June 2024, strong corporate earnings, and a stable currency.
Gross Domestic Savings Rate: A positive development in India’s economic performance was the improvement in the gross domestic savings rate, which reached a nine-year high in FY24 as of May 2024. This increase was driven by higher household financial savings. If these savings are channeled into productive investments, they could support future economic growth.
Investment Cycle: The investment cycle is expected to continue with greater participation from the private sector, assuming no major shifts in global dynamics and risk appetite.
Corporate Profit to GDP Ratio: In 2024, the corporate profit to GDP ratio stood at approximately 5%, reaching a 15-year high as of March 2024.
Economic Outlook: The longer-term outlook for domestic growth remains positive but is well-reflected in near-term valuations.
Earnings Growth: We believe mid-teen earnings improvement is possible at a broad level. Recovery in international demand conditions and local rural recovery could provide additional upside. Moving forward, market performance may largely depend on earnings growth. Large Cap-oriented strategies such as Large, Flexi, and Multi Cap appear better positioned. In the thematic space, Banking & Financial Services look attractive due to relative valuations.
Mid and Small Cap Allocations: In line with the medium-term perspective, staggered allocations to Mid and Small Cap through a systematic route are advisable.
