The month gone by – A snapshot
Global equity markets rallied further in July, as economic activities continued to expand in most countries. Though the spread of ‘Delta’ variant globally is emerging as a concern, high vaccination levels, particularly in developed countries, is helping to manage its impact.
China’s regulatory crackdown on the tech sector led to significant market correction. Due to the sharp sell-off in China, Emerging Markets (EMs) corrected by 7% in July. India outperformed its EM peers with 1% gain in MSCI India Index, while Developed Markets rose by 2%.
Inflationary pressures continue globally. The US Fed has indicated that the monetary policy in coming months depends on incoming data points. On the other hand, the European Central Bank has reframed its inflation target. This will enable it to continue with accommodative monetary policy.
S&P has retained India’s sovereign credit rating at BBB- on expectations that India’s economy will recover, once normalisation returns. All three major global rating agencies continue to rate India as ‘investment’ grade.
Economy recovery gains traction
With Covid-19 cases under control, many states continue to gradually reopen. High frequency indicators such as GST collections and electricity production suggest continued recovery in economic activities. Monsoon has shown good progress, which augurs well for the rural economy.
The government has continued to focus on capital expenditure, while maintaining fiscal discipline. Vaccinations has gathered pace in July. However, as a significant proportion of the population remains to be vaccinated, the risk of a third wave remains on the horizon.
RBI likely to reiterate monetary policy support
In June, inflation remained above RBI’s threshold of 6%. The RBI Governor indicated that ‘hasty reversal of monetary policy’ can have adverse impact on the economy and reiterated the need to focus on growth. We expect RBI to continue with accommodative monetary policy stance in the upcoming meeting.
Outlook: High inflation as well as elevated crude oil prices, have led to gradual increase in bond yields in July. Despite underlying bearish sentiments in the market, RBI is likely to continue taking measures to curb undue volatility.
Equity markets continue to consolidate with positive bias
Nifty index was largely unchanged in July as markets continue to consolidate amidst on-going corporate earnings season and improving domestic macro-economic data points. India continues to outperform its EM peers. Metals, Real Estate, and Information Technology sectors outperformed while Automobiles, Oil & Gas and Banking sectors underperformed in July.
Outlook: Macro-economic data points indicate near normalisation of economic activities supported by government measures, strong external demand, and benign liquidity conditions. Sectors with US$ linked earnings continue to witness earnings upgrades, thereby aiding strong growth in corporate earnings.
Rising inflationary pressures in select EMs coupled with increasing regulatory uncertainty in China’s technology sector could impact foreign flows in emerging markets and may lead to increase in volatility. However, domestic flows remain robust and are likely to support markets. The outlook on India’s economic growth prospects and corporate earnings remain attractive. We continue to maintain a positive view on equities.