EF Digest - August 2023

Dear Investors,

Indian equities closed the month of July at all time highs. The Sensex and Nifty gained 2.8 – 2.9% to close above 66,000 and 19,700 levels respectively. The broader market continued its strong rally, with mid and small caps outperforming large caps in July. Global liquidity is strong and the global market sentiment is risk on. FIIs ploughed in more than Rs 35,000 crores in July, but FII flows may slow down in coming months after the US Federal Reserve hiked interest rates by 25 bps in July. With hopes of stimulus in China, we may see reallocation in global institutional emerging market flows. Chinese stocks outperformed in July and may see high EM funds allocation to China in the coming month. However, we expect FII flows to India in coming months. In our view the market is in a momentum phase and the rally will continue at least till the end of this year.

As far as industry sectors concerned, all sectors were in green in the month of June. We are seeing sector rotation in the market. Sectors which had underperformed earlier are seeing strong recovery. Infrastructure, PSUs, power and metals were strong outperformers in July with 8 – 10% returns. Capital goods, healthcare, realty, oil & gas and telecom also turned in excellent performance giving more than 5% returns in July. Defensives like FMCG and Tech underperformed the Sensex in July. Banks and automobiles have been the strongest performers in the last 1 year and they continued to consolidate in July. Overall we continue to bullish on Indian equities. Investors should continue to invest in midcaps and small caps through SIPs. You can also take advantage of large corrections by investing in lump sum on dips.

In the last FOMC meeting the Fed indicated that it will do one more rate hike after the 25 bps hike in July; the market is expecting a 25 bps rate hike in September. With the interest rate cycle nearing its end and inflation still high, precious metals like gold and silver outperformed. You should avoid investing in gold in these market conditions unless you have very long investment horizons. Strong economic data in the US and strong USD will provide headwinds to gold. If you have invested in gold then you should hold because gold may bounce back in coming months depending on the economic data from the US. Crude oil prices jumped up in July as oil producers cut their inventories. Rising crude prices can pose inflation risks but the market does not seem to be concerned at this time.

As far as the debt market is concerned, the 10 year bond yield remained range bound between 7 – 7.1%, but we do not expect yields to go up much from here. We think bond yields have peaked and duration strategies may be yield higher returns for long term debt investors. Short term investors (1 year or less) can invest in ultra-short duration or money market funds. Medium term investors (2 – 3 years) can invest in corporate bond and Banking & PSU debt funds.

In this auspicious month of Shravan, I and my team wish you a very Happy Shravan and our 76th Independence Day.

Best Wishes,

Ajoy Agarwal,

(Managing Director)