Soaring in first half of FY24, equity markets likely to hit air pocket

Benchmark and broader market indices up 11-42% but rising US bond yields, oil prices threaten to pull them down

The equity markets, especially the small and midcap space, have demonstrated an impressive performance during the first half of 2023-24 (H1FY24). But escalating oil prices and US bond yields could potentially weigh on their showing in the second half of the financial year.

At the start of FY24, investor sentiment was subdued. A combination of sustained rate hikes by global central banks, sticky inflation, and a banking crisis in the West had taken a toll on the Indian market's performance. Days before the start of this financial year, the Sensex and the Nifty hit their five-month lows of 57,527 and 16,945, respectively, on March 24.

The outlook then appeared grim as the equity markets were experiencing an exodus of investment from foreign portfolio investors (FPIs). However, six months later, the markets have defied sceptics. In the April-September period, the Nifty gained over 13 per cent, while the Nifty Midcap 100 and Nifty Smallcap 100 rose by 35 per cent and 42 per cent, respectively. For the broader market, this is the best first-half performance since H1FY21 -- when stocks had rallied from their Covid lows.

The Sensex in H1FY24 gained 11.6 per cent. Last year for the same period, all the above-mentioned indices were in negative but for the outlier Nifty Midcap 100. On Friday, all the four indices ended in the green.  

The optimism that the US Federal Reserve would not be as aggressive with rate tightening as previously thought and hopes that the global economy would avoid a recession boosted risk appetite during the first half. Also, a shift away from China helped India attract more overseas flows. All these factors helped the domestic market clock gains in all but one month of H1FY24.

Encouraging quarterly results easing contagion fears regarding the banking crisis in the Western world and positive macroeconomic numbers that gave hope of Indian firms delivering high growth earnings pushed FPIs to increase their bets. “There was expectation initially that China would reopen, which would lead to growth. It didn't happen, and then India became the favourite market because of its economic stability and growth,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.

UR Bhat, founder of Alphaniti Fintech, said that when banks were failing in the West, India’s banking system was doing well, which made FPIs more bullish towards the country. “And corporate results and economic indicators gave an impression that Covid was behind us and economic momentum was picking up.”

FPIs were net buyers in five of the past six months and bought shares worth Rs 1.43 trillion. Domestic investors, too, joined forces, buying shares worth Rs 50,408 crore during the first half of 2023-24. Such strong inflows helped the Indian equity markets become one of the best-performing markets during the period under review.

While the first half proved to be a dream run, returns are expected to moderate during the second half as the markets will have to navigate tough headwinds. The hawkish outlook from the US Federal Reserve this month has intensified selling by global funds.

Although the American central bank kept rates unchanged in September, it signalled that rates could be higher for longer. Rising bond yields and crude prices have given fresh impetus for selling. Brent crude prices have soared 12 per cent in the past month and are approaching $100 per barrel. Given India’s high import of crude oil, this could make the Indian markets somewhat less attractive vis-à-vis peers.

Holland said the more immediate factors are negative for the domestic markets as crude oil prices surge. “And toward the end of the calendar year, the focus would shift to (the Assembly and Lok Sabha) elections. So, the outlook is negative in the short term,” said Holland.

Bhat noted investors usually book profit ahead of any significant event, such as the general elections, the results of which are slated for May 2024. “The Fed continues to be hawkish. We had historic highs and are running into the election year. Moreover, the Indian markets don't do well when crude prices cross triple digits. Crude oil prices and quarterly results will determine the market trajectory,” he added.

Data for MF up to Sept 21, FPI up to Sept 27, and DII up to Sept 28     Sources: NSDL, Sebi, Exchange, Bloomberg  Compiled by BS Research Bureau