Over the past 3 months, the Indian market has traded cautiously, with the Nifty50 index confined to a narrow range of 1,000pts, between 21,800 and 22,800. However, this week has seen a departure from this trend, as the market comfortably surpassed this range, closed at a new high of 22,952 after intraday crossing 23,000. In the short term, the market’s direction will depend on the final outcomes, particularly considering elevated expectations for a major win by the current government, as indicated by the market sentiment.
This week’s breakout is triggered as the market approaches near the D-day, with just one week to go for the national election result. Pre-election result volatility was the main reason for a consolidation in the market, led by selling from FIIs. As foreign investors concluded to invest in other EM at the time a nation’s goes busy under polling starting from the notification date of Phase-1 of 20th March to the final election result date of 4th June, a total of 2 ½ months. India’s economy engine slowed down regarding new measures, policies, and spending. It made sense for FIIs to shift the focus to other EMs as MSCI-INDIA premium to MSCI-EM is tall at 80%. At the same time, improvements in the Chinese market, led by green shots provided by the government, have provided new measures to spur growth and fix real estate problems. FIIs have been a net seller in India in the last 2 months.
Another contributing factor to the market breakout is the early onset of the southwest monsoon, observed along the southern coast this week. The monsoon arrived approximately two weeks earlier than usual due to a cyclonic storm in the east-central Bay of Bengal, resulting in low pressure systems. It did provide ease to underperforming sectors like FMCG and Consumption, which are highly oriented to rural demand and cost of inputs. The negative effect of the heavy heatwave in FY24 impacted the performance of agriculture and rural demand related industries. This weak outlook forecast is bound to be re-revamp in FY25 due to the strong La-Nina effect on agriculture, increased foodgrain yield and the rural economy.
Thirdly, few sector like Metals, Power, Capital Goods, Realty, Auto and Public Sector Enterprises supported the market, leading to the new high. Metals were led by green shoots in China and high demand for copper in renewable energy, where supply has contracted due to sanctions on Russia, a key producer. The metal stocks are up by 30% in the last 2 months. Infra, capital goods and auto are the best performers due to high domestic demand led by government spending and manufacturing.
Manufacturing companies in India, which are highly oriented to India’s GDP growth, have outpaced the broad market by 4times in the last 2 months. GDP growth is estimated to close FY24 at 7.8%, a whopping number compared to the average 6.5% forecast in January 2023. The GDP growth forecast of 6 to 7% from FY25 to FY30, has a good chance of upgrading as the manufacturing policy measures is prone to strengthen further.
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Published: 26 May 2024, 03:27 PM IST
