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Below is the Equity Outlook – August 2022 By Sunil Damania, Chief Investment Officer, MarketsMojo

Equity Outlook – August 2022

Investors have had to battle one crisis after another for the past 8-10 months, like high inflation, higher interest rates, a never-ending pandemic, the Russian-Ukrainian war, supply-side constraints, heavy FII-selling and a falling rupee against the dollar. But things are finally looking up.

Mood is Changing

For July, the market turned out to be the best month of the current financial year, with the Nifty and Sensex surging by 8.5 per cent. Again, mid and small caps participated, and all sectors shone in the green.

July's rally helped reinstate the gains that investors eagerly awaited after seeing a steady portfolio bleed over the months. But then again, this is how the market operates -- it frustrates you and suddenly changes trajectory. There were talks in July that the Nifty would touch 14000, but now no one talks about the Nifty touching the 14000 level. 

But the moot question is if this rally is sustainable. Here's why we believe the rally would be sustainable:

1. FIIs are returning and are here to stay this time. FIIs sold heavily in the last nine months but turned positive in July, and that trend continued even in the first week of August. Why are FIIs returning? Because of India's strong economic growth. IMF has revised India's GDP growth, but India will still be fastest-growing large economy in the world. And if the economy grows, India Inc.'s earnings would also increase. And with a rise in India Inc earnings, FIIs would look to chase the growth story. Given favorable conditions, FIIs will have every reason to return to the Indian equity market as they look to invest in countries that can help them generate alpha on the portfolio.

Despite FIIs selling heavily in the first six months of 2022, we believe FII investments would be positive for 2022. In other words, we believe FIIs would invest more than what they sold in the second half of 2022.

2. Southwest Monsoon has progressed well with 8 per cent above normal range until 31st July. That should further help boost the rural economy and cut food inflation. Rural slowdown was one concern that good monsoon can tackle.

3. While the world has been struggling with inflation, India's inflation numbers are declining. For instance, inflation numbers in May were lower than April's, while June data revealed inflation lower than in May. With crude prices diminishing, various other commodity prices are also declining and supply-side concerns easing, it will release pressure on inflation. 

India Inc. Results 

Over 60 per cent of India Inc. has reported June quarter numbers showing a 32 per cent jump in YoY sales and 26 per cent growth in net profits. Many analysts do not seem impressed with these numbers. However, I beg to differ.

We need to view these growth figures in the context of the market conditions they have been operating in. For instance, despite the rupee's depreciation, the government's decision to impose a 15 per cent export duty on finished steel products, crude oil volatility etc., and other factors, India Inc.'s numbers deserve accolades.

What To Expect Going Forward 

The market carefully looks at two figures: inflation numbers and monsoon progress.

While monsoons help boost the rural economy, it will also help to understand the trajectory of inflation. China, US, India, Brazil and Argentina account for 60 per cent of the world's food grain production. Hence, less than average monsoons could pressure food inflation in India and globally.

Regarding the rupee, I believe it has hit bottom and may not dip further from the Rs 80 level. FII inflows and crude prices coming down should ease pressure on rupee depreciation. The RBI’s recent hike of 50 bps interest rate by 50 bps is to protect the rupee.

What Should Be Your Strategy

When investing in the equity market, you must have a three-year to five-year horizon. We believe the market is very close to the bottom if it has not formed yet. Hence, we do not expect a substantial downside hereon. Most importantly, Nifty can go to 16000 levels but will not remain there for long.

We believe that July gain is not an aberration. So now is the time if you are still waiting for an opportune moment to enter the stock market.

Market sentiments by October 2022 (around Diwali) would be more jubilant than it is currently.

Above views are of the author and not of the website kindly read disclaimer