Cautious optimism

Global headwinds may add to volatility in stocks

Investors have reason to be satisfied with stock-market returns at the half-year mark of 2023-24. They also have reason to be cautious, heading into the second half of FY24. The major market indices are up 12-13 per cent since April. But the pace of earnings growth slowed in the first quarter. Global growth is muted and this has meant reduced exports and a lower increase in revenue for IT services. Another pressure-point is high energy prices. The combination of lower exports and higher energy costs has led to wider external deficits.

The US Federal Reserve (Fed) maintains a hawkish stance and has signalled it could keep rates up and money supply tight for an extended period. The other worry is that China’s vast real estate sector could collapse under its huge debts and losses. Meanwhile, the Ukraine war continues and is now causing global food supply disruptions.

Despite the gloomy global outlook and nervousness on the political front with a string of elections due, the domestic institutional attitude is bullish. So are retail investors. But foreign portfolio investors (FPIs) have turned risk-averse in the last two months.

Domestic institutional investors (ex-mutual funds) pumped Rs 47,500 crore into equities between April 1 and September 28. Equity mutual funds received inflows of Rs 46,229 crore during April-August. Over 80 per cent of this consists of household savings, indicating strong retail sentiment. Retail investors also bought directly across smallcaps and midcaps.

FPIs sold Rs 47,312 crore of rupee-denominated shares in August and September after buying stocks worth Rs 74,750 crore between April and July. The switch in attitude was triggered by the Fed. The Reserve Bank of India (RBI) has held policy rates steady for the past four updates, but given the Fed’s stance and domestic inflation running at above the band of comfort, the RBI lacks the headroom to cut rates or loosen money supply.

On the plus side, the economy continues to grow. Most sectors are doing better than their respective pre-Covid (2019-20) levels. By general consensus, India is the fastest-growing major economy. A large part of this growth is driven by the policy thrust to create more infrastructure capacity and expand domestic defence manufacturing and procurement. The offtake of steel, cement, and other industrial metals, and higher power demand are keeping core sectors buoyant. Stocks in these sectors and in defence manufacturing are among the best performers.

There are some signs that private consumption and investment are picking up. There are strong order flows for capital goods manufacturers, and an uptick in automobile sales and retail credit demand, including strong numbers in new mortgages and higher credit card usage. The second-quarter results would indicate how broad and sustainable this rebound in consumption demand is.
 

The coming festival season will be critical since big-ticket consumer expenditure is clustered around this period. The monsoon has been patchy with unseasonal rain in some regions and low rain in other places, and this may impair rural demand. On the other hand, election-related spending could also help to put money in people’s pockets.

Optimists will hope interest rates have peaked and political volatility is temporary. Pessimists will fear knock-on effects if China’s real estate goes into a complete tailspin. One could make a case for the market heading north or south. But the period until the Lok Sabha elections will certainly be volatile.