Indian markets continue to enjoy a bull-run, with Nifty reaching a record high of 18,000 and closing above 17500 levels at September end, up 4% for the month. With the Indian economy coming out of the second covid wave, mid-and-small caps outperformed large caps by 3-3.5% in September 2021. By sector, realty, media, consumer durables, PSUs, power and oil & gas outperformed while metals, healthcare, IT, FMCG, and banks lagged.

Year-to-date, Nifty is up 25%+ and has outperformed global equity markets. Positive news on the COVID front has given a boost to Indian equity markets and even if there is a third wave, its impact is expected to be much lower than in the first two waves. Record low interest rates, government reform/relief measures, improved vaccine access, and subsequent pick-up in service sector activity have kept momentum strong. Some cooling off was seen over the last week with concerns over rising inflation in the US led by supply chain disruptions and uptick in global bond yields after the US Fed announced its tapering timeline to start in November 2021 and end by mid-2022. However, Foreign Institutional Investors continue to be net buyers of Indian equities (+$1.4bn in September 2021, following +$1.0bn in August 2021).

Macro data-points are also showing an uptick. Service sector Purchasing Managers’ Index rebounded to an 18-month high and India’s August Consumer Price Index printed slightly below expectations coming in at 5.3% yoy. GST collections grew 30% YoY in August to Rs 1.12tn. India’s Foreign exchange reserves are close to its all-time peak, standing at $640bn currently. 10-year yield was flat at 6.22%. INR ended at ~74.24/USD, down 1.7% over the month.

On the flip side, oil prices gained 10.6% in September, closing at $79/barrel. Oil prices rose helped by growing fuel demand and a fall in U.S. crude inventories as production remained hampered in the Gulf of Mexico after two hurricanes. Rising oil prices remain a concern for the equity markets as it will impact India’s Current Account Deficit.

Recent developments in China have also heightened volatility in markets. However, recent news flow points to a managed collapse of Evergrande and financial contagion looks contained. China's policymakers have asked state owned enterprises to buy Evergrande assets, asked banks to support property market and ease mortgage payments for some buyers, and injected USD 87 bn liquidity into the financial system. Recent power shortage in China has led to a production slowdown which has disrupted the demand-supply equation for commodities and led to volatility in commodity prices.

View on the Market

Globally, markets are trying to climb a wall of worry on several fronts. US Fed and European Central Bank (ECB) have lowered projected growth rate for US and Eurozone respectively. Although growth will still be relatively strong, it has likely peaked out and growth rate will start slowing down in US and Eurozone. At the same time, China's growth rate is also expected to slow due to the govt proactively slowing down credit growth, regulatory action, slowdown in the property sector, and recent power shortage. In addition, inflation is rising due to supply chain disruptions and yields have started rising with the expected start of tapering by the Fed in November 2021.

At the same time, in India, with no major earnings upgrades, India’s relative valuations have become richer after the continuing rally in equity markets. Hence, we continue to maintain a cautious stance on markets in the near term. However, we are still constructive on India’s growth going forward. India has been late in the recovery process versus developed markets but has the potential now to catch up. Consequently, a recovery in earnings growth is also expected.

In addition, because of continuing uncertainty in China, India is also getting some benefit in terms of allocation from global fund managers. While China has underperformed in the past few months, India has done relatively better amongst Emerging Markets and this can be expected to continue.

Overall, market still has legs to continue rising although we may see intermittent corrections. Investors should use any correction to add to their equity exposure.

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