Markets experiencing high volatility driven by various events including high valuations
The markets in the month of July continued the upward momentum and delivered return of 3.9% on a monthly basis. However it experienced significant volatility near budget day and on budget day based on budget expectations and the budget announcements. On the budget day market fell 2% on intraday basis post announcements, however recovered almost all losses to close near flat for the day. The Budget highlights have been explained in a separate section. Market rallied in last week of July to close at all time high, nifty at 23951 and Sensex at 81741. Market reached another significant milestone on 1st Aug’24 with Nifty crossing 25k and Sensex 82k. Indian market has rallied upward from month of Mar’23 with Nifty at 17k level till 25k level as on date delivering staggering return of 47%. Different sectors, midcap and small cap have even delivered higher returns. This has raised genuine valuation concern for the market. The market cap of Exchange listed Indian companies has touched 5.5 Trillion USD Vs India’s GDP of 3.9 Trillion USD. This was also supported by Global Market rally including US Markets. The Indian market has outperformed all major markets for the Year and longer 3 year to 5 year period.
The market rally witnessed Jolt and high volatility in 1st week of August. This was across global markets due to multiple global headwinds including recessionary fears in the US following disappointing job statistics, the unwinding of Yen carry trades, high Valuations and escalating tensions in the Middle East. The big market fall was on 5th Aug’24 for all the Markets including Indian Market. Sensex, Nifty plummet over 3%, Nikkei plunged over 13%, and other markets such as Korea, Taiwan, and Australia saw declines between 2.5% and 7%. Japanese Market fall was biggest and next to its worst single-day rout of 3,836 points, or 14.9%, on a day dubbed “Black Monday” in October 1987. However market started consolidating and few markets recovered from the lower levels. Indian market is showing resilience around levels of Nifty at 24k and Sensex at 79k. As of this month, market is down 3% and the same trend may continue with volatility and consolidation.
Budget July 2024 Highlights
The Union Budget for the financial year 2024-25 was tabled in the Parliament by Finance Minister Nirmala Sitharaman on 23d Jul’24. This was the seventh budget presented by the current FM and the first one of Prime Minister Narendra Modi-led government’s third term. “India’s economic growth continues to be the shining exception and will remain so in the years ahead,” said the FM in her budget speech. The global economy while performing better than expected is in the grip of policy uncertainties. There are significant downside risks to growth and upside risks to inflation, she added.
The FM listed nine priorities for this year and coming years. These include productivity and resilience in agriculture, employment and skilling, inclusive HRD and social justice, manufacturing and services, urban development, energy security, infra, innovation and R&D; and next generation reforms. This focuses on job creation and boosting consumption, potentially benefiting consumer goods, real estate, and auto sectors. The government has retained Rs 11.11 lakh crore capital expenditure for FY25 which amounts to 3.4 percent of India’s GDP.
FM announces changes in new tax regime – standard deduction proposed to increase to Rs 75,000 from Rs 50,000. In new tax regime, tax rate structure to be revised to: (in Rs) 0-3L – Zero, 3-7L – 5%, 7-10L – 10%, 10-12L – 15%, 12-15L – 20%, 15L & above – 30%. Salaried employee in new tax regime will save up to Rs 17,500 in income tax. The Finance Minister announced that long-term capital gains on all financial and non-financial assets will attract a tax rate of 12.5% from 10% earlier. Meanwhile, short-term capital gains tax has been increased to 20% from 15% earlier. Additionally, the limit of exemption for capital gains will be set at Rs 1.25 lakh per year. Indexation benefits have been removed prospectively on all assets including Real Estate. In a significant blow to Futures and Options (F&O) traders, Finance Minister Nirmala Sitharaman declared raising the STT rate from 0.01 percent to 0.02 percent. So, after implementing this budget proposal, equity and index traders will have to pay double the tax for their trade. FM has also announced Initiatives in areas of Job creation, women empowerment, Agriculture, rural development, MSME, Manufacturing and Financial initiatives. Fiscal deficit estimate lowered to 4.9% of GDP from 5.1% in interim Budget. FM aims to reach a fiscal deficit of below 4.5% by FY26. There was mixed reactions on the budget with major disappointment on the increased capital gains taxation.
Sectoral performance & outlook
The sectoral performances are in the direction of the market, however there is variation in performance on monthly and YTD basis. In line with the markets, most of the indices also touched their life time high. Sectors that have done very well in July are Software, Pharma and FMCG, as they perform well during high volatility. The sectors that were laggards in July are Private bank, metals and Realty. Midcap and small cap has outperformed large cap in this period. The sectoral which can do well in August are Pharma, Software, Private banks and which can be under pressure are Auto, Realty, metals, midcap and smallcap.
Outlook for the Indian Market
All Global markets experienced correction and significant volatility recently and most have made their life time high last month. Indian market has still performed better relatively than other markets. Gold and silver have also corrected in July and current month after significant rally. Gold is trading around Rs 70k/10 gm after touching an all time high of 74.7k /10 gm and Silver is trading around 80k / kg after touching an all time high of 96k / Kg respectively. Midcap and small-cap have performed much better than large cap and also trading at higher valuation compared to historical averages. The prudent approach for investor is to do partial profit booking, remain diversified across asset class and rebalance it on basis of sectors and valuation for meeting their financial goals and risk management. Indian Markets and global markets are showing resilience after small corrections and consolidating with volatility in between. However, the valuations appear stretched and Investors with lump sum investment should wait for better entry at lower levels. The fundamental and technical outlooks for this month are as follow.
Fundamental outlook: Indian market is trading at stretched valuation especially midcap and small cap space and this has been re-iterated in previous months outlook as well. Nifty broad levels to remember are high of 12k before Covid March’20, then crash to 7.5k level (which was near high of Jan 2008) , then high of 18.5k in Oct’21, followed by consolidation and moderate corrections till 15k in Jun’22 and then strong upward momentum from 17k levels in Mar’23 till 25k level this month. The market cap to GDP is also at near all time high of near 150% already discounting many positive factors and robust growth. On long term basis, corrections if occurs Nifty may touch levels like 22.5k, 20k and major support zone at 18k. Currently the market and various sectors have run up ahead of their fundamentals. Hence, Investors should be cautious at these levels. Selective investment can still be done in some sectors or companies where valuations appears fine. There are many headwinds like geo political risk, recession fears, Valuations, unemployment, income disparity and climate change which may impact the economy and market. The prudent approach for Investors is to remain invested via SIPs, do partial profit booking and rebalance with diversification. Healthy corrections as and when occur may offer opportunity to invest more. Consult and review your investments with your investment advisor.
Technical outlook: Indian market has been volatile this month after forming top. Have taken support at 24k as of now and broad trading range is zone of 24k to 25k. It may even spend time within the top of 25k throughout the year with consolidation and volatility. Nifty is currently in mild correction zone on basis of various technical parameters. The RSI is in overbought zone of 85. The immediate resistance for nifty is 24600 and may face strong resistance at 25100 level. The immediate support for nifty is seen at 23600 and major support at 23000.
