EF Digest - August 2024

Dear Investors,

The Sensex closed July above the 80,000. Nifty also made record high, closing near the 25,000 mark. The market shrugged off the Budget blues (capital gains taxes raised) and continued its bullish momentum. The rally was broad based with midcaps and small caps outperforming the Nifty. Nifty Midcap 150 and Nifty Small Cap 250 TRI have given nearly 28% and 27% YTD returns respectively (as on 31st July 2024). Sector rotation continued in July. FMCG, Healthcare, Oil and Gas, Infra and Tech were the best performing sectors in July, while banks, metals and realty underperformed. FIIs continued to be net buyers with more than Rs 30,000 crores of net purchases in July, while net purchases by Mutual Funds exceeded Rs 14,000 crores.

US equities continued their strong run with S&P 500 posting 1.1% gain in July. Among the other developed markets, the Nikkei and Hang Seng were down, CAC was flat, and the DAX made modest gains. The unwinding of the Yen carry trade after the Japanese central bank hiked interest rates caused volatility in global equity markets. Yen carry trade is a strategy by which investors borrowed in Japan (where interest rates were very low for a long period of time) and invested in markets where they got higher returns. Recent job market data from the United States raised concerns of a recession in the United States. The Federal Reserve Chairman Jerome Powell indicated that rate cuts will be on the table in the September FOMC meeting.

India is in a macro-economic sweet spot. IMF has forecasted India’s FY 2025 GDP growth to 7%, which will again the highest growth rate among G-20 economies. The fiscal deficit has been narrowing – from 6.4% in FY 2023 to 5.6% in FY 2024. In 2024 Union Budget, the fiscal deficit target for FY 2025 is 4.9%. Government borrowing for FY 2025 will be Rs 1.4 lakh crores less than what was estimated in the interim Budget. This may lead to softening of bond yields. The capex outlay for FY 2025 is Rs 11.11 lakh crores, which is Rs 1.1 lakh crore higher than the previous fiscal year.

The 10 year G-Sec yield has been flat at around 7%. However, yields have softened by 8 – 11 bps towards the shorter end of the curve (3 – 12 months) signaling mean reversion of the yield curve. The yield curve has steepened considerably. Yields are attractive in 4 to 6 year range and also in 8 to 10 year range, with potential of capital appreciation when interest rates go down. Overall, the debt market scenario is favorable for investors with 2 – 3 year investment horizon. For short term investors with investment horizon of 1 – 2 years, yields are attractive compared to traditional fixed income investments.

Q1 earnings of most Nifty companies have beaten street estimates. The market mood is bullish, though we may see some volatility from time to time depending on global news. Investors should remain disciplined and continue to invest through SIPs. Assuring you of our best services.

Best Wishes,

Ajoy Agarwal,

(Managing Director)