February 2022

Month gone by

The Nifty after recording an impressive 24% YoY gain in CY21 has begun the year on a cautious note. The month was characterized by extreme volatility, with the benchmark oscillating in a wide range and pulling back significantly to close flat MoM. The increase in volatility was led by weak global cues, with concerns around inflation and potential rate hikes sparking a risk-off globally, leading to elevated FII outflows from India. FII recorded outflows for the 4^th straight month in Jan’22 while DIIs saw inflows for the 11^th consecutive month.

Budget Key takeaways

From an equity market perspective, we believe the budget, on balance, has no unpleasant surprises. There remains some room for further spending push as the government is likely to overshoot its revenue targets. While there could be some disappointments on the absence of measures to improve consumption, we believe the economic recovery in FY23 coupled with vaccination progress would continue to drive demand recovery ahead. Crude prices around $90 could present a challenge for inflation ahead and act as a pain for fiscal maths.

Earnings review

In the 3QFY22 earnings so far, we have seen a wide divergence between sectors affected by rising raw material prices (Consumer, Cement, Auto, and Metals) and those not directly impacted by rising prices (Private Banks, NBFCs, and Technology). 1) IT: 3QFY22 was a good quarter for Indian IT Services as companies reported an overall growth of 4.6% (USD), despite seasonality due to furloughs. The demand environment remains strong. 2) Private Banks: Asset quality trends have improved. Most Banks reported a decline in their NPL ratios, led by controlled slippages and healthy recovery and upgrades. 3) Consumer: Volume growth in Staples was weak, led by the inflationary impact on volumes, reduction in grammage to pass on material cost increases, and slowdown in rural demand. Consumer Discretionary, however, saw faster growth due to improved mobility and pickup in the pace of consumption during the festive season.

Sectoral Performers

Top gainers in the sectoral space were PSU Banks (+18%), Utilities (+13%), Oil & Gas (+10%), Automobiles (+7%) and Private Banks (+6%), while Technology (-10%), Healthcare (-7%) and Consumer (-3%) were the biggest losers.

Global Markets

Barring Brazil (+7%), the UK (+1%) and Indonesia (+1%), Jan’22 saw key global markets such as Korea (-11%), China (-8%), Japan (-6%), Russia (-6%), the US (-5%), Taiwan (-3%), MSCI EM (-2%), and India (-0%) end lower.

View

Given the continuity of policy measures and announcements, we believe markets will discount the budget and shift focus to: a) rising interest rate regime globally and consequent higher bond yields and b) corporate earnings growth that has remained resilient so far in the ongoing 3QFY22 earnings season. The forward earnings estimates have remained stable. The forthcoming RBI policy meet on 9th Feb’22 assume greater significance now with respect to the future of liquidity and interest rates. Valuations are slightly rich with Nifty trading at 20x FY23E EPS and thus the corporate earnings delivery becomes highly crucial, more so in a rising rate regime. Our preferred sectors are IT, Consumer, BFSI and Healthcare. We expect markets to remain volatile and hence advice investors to remain disciplined and stick to your asset allocation.

Source:- nseindia.in, screener.in and MOFSL

DISCLAIMER: The information contained herein is a compilation from multiple sources. Pendulum Investments Services accepts no responsibility for any fallacies or inaccuracies in the information.