Equity and Debt Newsletter – March 2022

The Indian market along with the other major international indices witnessed selling pressure in the month of February. The market started the month well by the welcome the growth-oriented budget, consistent GST inflows, RBI meeting and strong earnings. But, the international cues led to a sharp correction while pushing the volatility to the sky. The FIIs remained on the selling side by withdrawing Rs. 35,592 crores ($4.91 billion) from the equities. The DIIs on the other side continued buying in the market however; they could not help the market to stabilize. On the monthly chart, the Nifty50 lost 3.15% on the bourses while the Sensex declined 3.05%. The CNX Midcap and Smallcap underperformed the Nifty50. As the pressure grew in the market the investors sold out loss-making, low growth and higher valued stocks, making the Smallcap and Midcaps record a plunge. The CNX Midcap corrected ~6.8% while the Smallcap tanked ~11.4% on the bourses. The domestic cues were favourable. The market welcomed the growth-oriented, union budget was a growth-oriented budget, non-populist budget. In the budget announcements, the capital expenditure increased by 35% to Rs. 7.5 trillion, no changes proposed in tax slabs, support increased to indigenous products, while the focus is shifting towards Infrastructure. The LIC IPO was the talk of the town this month. The Government proposed to sell a 5% stake in the company to come up with the biggest Indian IPO so far. The Government is also keen to come up with a digital rupee in the future. Continuing this venture, the RBI in its meeting this month kept the rates and stance unchanged. The Central Bank said that the economy needs continued policy support as the Omicron affected the growth activity. On the global market front, the indices reported a mixed response. The US market declined, Asian market inched up while the European indices plunged. The US indices, Nasdaq and S&P 500 entered into correction territory, which means that both the indexes corrected more than 10% from their all-time highs. The Fed’s comment to raise rates aggressively put pressure on the market, especially on the loss-making tech companies, but when Russia invade Ukraine by sending troops and bombing its capital Kyiv, the indices could not handle the selling pressure. The Dow and Nasdaq corrected ~3% while the French and German indexes recorded severe falls. The Russian index MOEX declined 45% on invasion news, to which the Central bank came forward and banned short selling. The Russian regulator has suspended trading after February 25th. On the global cues, the Russian attack on Ukraine was followed by many sanctions. Result of these sanctions, the commodity prices escalated, and Crude oil prices jumped above $100 per barrel (highest since 2014), natural gas prices bounced, USD strengthened and the US 10 years bond yield softened. The lower supply concern escalated the energy prices. The sudden escalation in commodity and crude prices possess a threat to the already high inflation. The Fed announced to come up with an aggressive rate hike as the retail inflation in the US grew to 40 years high while the GDP expanded better than expectation. But, as the border tension escalated between Russia and Ukraine, the market started to anticipate less intensified rate hikes. Indices Witnessed Steady Rise And Sharp Fall The Indian market witnessed a plunge in which the Smallcap and Midcap bled. The indices started the month on a steady note after the budget but the expectation of an aggressive rate hike by the fed at first and then the Russian invasion in Ukraine caused a commotion. The Nifty50 fell below the 17,000 mark, whereas the Midcap and Smallcap underperformed with a considerable margin. The domestic cues were stayed put, corporate earnings were decent, but the negative global news kept the markets under pressure. Nifty 50, Nifty Midcap And Nifty Smallcap Performance Nifty 50 1735417340 NIFTY MIDCAP 3044230274 NIFTY SMALLCAP 1128911116 Nifty Sectoral Performance The sectoral performance was highly concentrated in the month. The Nifty Metal outperformed as the war in Europe made the commodity prices soar. The interest rate hike fear pulled the rate-sensitive stocks and sectors down. The Nifty Auto declined on chip shortage and rising crude oil prices, while Infra could not sustain the gains despite a positive push in the Union Budget. The Global Indices The global indices ended mixed in which the US market posted a decline, Chinese market recorded gains while the European indices especially CAC40 and DAX bled as war erupted between Russia and Ukraine. The Fed’s indication this month to hike rate with more intensity also affected the investors’ sentiments negatively. The GST Collection Remained Strong The GST collection remained strong in February 2022, showcasing resilient economic growth. This was the fifth straight month when the collection remained above Rs. 1.30 trillion mark. The higher collection (+17% YoY) is a strong indicator that the domestic economy is consistent in its performance. IIP Numbers Remained Under Pressure The Industrial production in December came muted with a 0.4% rise, missing the market expectation of 1.3%. This was the smallest gain in industrial output since Feb 2021 as the production slowed down in mining while it decline in manufacturing activities. PMI Numbers Inched Up The PMI numbers inched up from last month’s data. The Service PMI came below market expectation of 53.0 as both the output and new orders came below the long term average. Manufacturing on the other hand expanded at a strong rate. 10-Years Gilt (India and US) Both the US and India bond yields escalated in the first half and softened later in the month. The rate hike fear by the Fed and higher capital expenditure in the Union Budget push the 10-years Gilt near 6.90. But, the investors’ search for a safe haven amid the escalated border tension brought the buying pressure back in the bond market. Inflation Chart (CPI and WPI) The retail inflation inched up further and grew above RBI’s tolerance level (6%) as the food inflation jumped up to 5.43% but the WPI inflation cooled down slightly to 12.96% from 13.56% last month amid moderated Fuel and Power prices in the month. The Rupee And Brent Crude Oil The Brent prices gained ~10% in February after recording a 17% rise in January this year. The consistent outperformance came as several nations sanctioned Russia. As the number of sanctions on Russia rose in the month, the threat on crude oil supply heightened. The Dollar on the other hand appreciated against the other currencies as the investors were searching for safe-havens. War Made Russia Highest Sanctioned Country In The World As Russia invaded Ukraine, the countries around the world started sanctioning Russia, making it the most sanctioned country, curbing on its dealing with other countries. The European countries (Switzerland and France) leading on the most sanctioned chart after Russia’s declared a war in Ukraine. Sanctions Skyrocketed Commodity Price As the countries imposed sanctions on Russia, commodity prices skyrocketed. The Bloomberg Commodity Spot Index (BCOMSP) is a measure of the price movement of commodity subindexes. It recently surged past its record 600 level, well above its long term average. Sanctions Expected To Lead The Inflation Up The Crude oil prices are at 7 years high, commodity prices are skyrocketing at the time when the global inflation numbers are already at highs. The recent developments are likely to push the global inflation numbers up. India Amongst The Most Affected By The Bull Run In Crude Prices India would be affected severely by the recent crude oil price hikes. The economy is likely to shred, and the inflation to shoot up as India imports ~85% of its total oil demands. As the Brent prices surged past $100 per barrel, the fuel prices in the country are most likely to accelerate after the state’s election results. The GDP Growth Numbers The Indian economic growth slowed down in Q3FY22. The 5.4% annual GDP growth missed the market expectation of 6%. This was the fifth straight quarterly GDP expansion driven by, softening COVID restriction, strong consumer demand and Government’s policy support. India Amongst The Top Growing Countries Despite the slowdown in the annual GDP growth, India remained one of the top growing country (real GDP growth rate) in the world. The resilient economic activity, continued Government support, rising capex and private consumption are expected to keep the country on the its fast growing path. FIIs Monthly Flows In Equity The FIIs are pumping their investment out as the volatility escalated, negative global cues worsened and the fear of aggressive rate hike grew. The foreign investors withdrew $4.9 billion in February 2022, highest monthly withdrawal since March 2020 by outpacing the last month’s net selling of $4.7 billion in the cash equity segment. FIIs Monthly Flows In Debt The story for the debt segment went the same though the intensity was not as high as equity. The FIIs were net sellers in the segment as they pulled out $412 million in February 2022. What We Expect Going Forward? Global cues have been driving the market. The Fed’s decision and commentary in the next meeting and geopolitical tension are likely to give direction to the market. The market is feeling intense pressure in the wake of geopolitical concern. We advise that a sharp fall would be a good opportunity to invest in the market with a long term investment horizon. ?The inflationary pressure is likely to rise again. The recent CPI numbers were above RBI’s tolerance level. As the crude oil prices surged recently, we expect the fuel prices to rise which would push the inflation further up. The rate hike fear is emerging due to a rise in inflation around the world. We reiterate our expectation of bond yields to be around 7% in the near future.