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Indian equity markets, after witnessing a sharp recovery in July and August, have been trading in a range since then. While domestic equity markets have been volatile in the last one year, the recent recovery has brought it to near all-time high levels. Midcap and small cap continue to outperform as overall stability helped investor sentiments.

Currently, the Nifty 50 Index and Nifty Midcap 100 Index are trading at less than 5% away from their respective all-time highs in October 2021. However, Small cap Index is still ~20% away from its all-time high levels.

The economic data was mixed in the last one month with US CPI coming in higher than market expectations. The same led to a rise in bond yields and a sharp fall in global markets on expectations of a substantial rate hike by the US Federal Reserve. The Fed is expected to hike rates by 75 bps in its September 21, 2022 policy meeting.

Indian equity markets continued to outperform their global counterparts as investors expect better earnings prospects due to a cool-off in commodity prices and better growth prospects compared to other countries. A sharp fall in global commodity prices, particularly industrial and agri commodities, has helped lift otherwise weak investor sentiments. Crude oil prices have also corrected to less than US$95/barrel from a high of above US$120/barrel.

Foreign portfolio investors (FPIs), who were consistent net sellers, turned net buyers since July 2022. Domestic investors, particularly mutual funds, have been major buyers during the same time absorbing the FPI sell-off

The latest quarterly result season has been broadly decent so far with indications of a healthy demand environment. Despite there being pockets of margin pressure, there has still been decent profit growth driven by volume growth and operating leverage.

Outlook

US Fed is expected to hike rates by 75 bps in its September 21, 2022 policy meeting outcome to tame multi-decade high inflation. However, the same is now well discounted by both bond and equity markets. Accordingly, equity markets may not react meaningfully despite the rate hike.

Domestically, with a capex cycle revival on the anvil (public + private) coupled with strong consumer demand across most categories in a post Covid environment (passenger vehicles, retail, etc), we remain constructive on the overall markets.

However, with markets recovering almost all their losses and trading back at around all-time highs, it is better to adopt a buy on dips allocation strategy instead of lumpsum at current levels.

Despite the spillover of global geopolitical tensions and financial market volatility, the Indian economy has stayed on the path of improvement and economic revival. The movement of various high frequency indicators reiterates the momentum in the domestic economy. The economic cycle now has more legs (manufacturing revival, capex, global exports) vs. the earlier consumption led cycle.

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