Indian markets should start its journey upward by October – know why? Analyst lists out 4 reasons

By: Sunil Damania, Chief Investment Officer, MarketsMojo

May was a month of surprises. Firstly, the RBI surprised with a 40bps rate cut just before the Fed policy action. Typically, the RBI does not announce rate changes beyond the monetary policy. But then the government announced a few policy decisions to curb inflation such as -- a ban on wheat exports, export duty on steel, limiting the number of sugar exports to 10 million tonnes and lastly but not the least, reducing the excise duty on petrol by Rs. 8 per litre and diesel by Rs. 6 per litre. 

While these measures will help cool down inflation, they appear to be temporary reliefs on the petrol and diesel front. OMC continues to have under-recovery of about Rs. 13 per litre on petrol and Rs. 24 on Diesel. Moreover, crude prices have surged in the last one week, suggesting that the government will have to pass on the cost to the customers by allowing higher petrol and diesel prices as such under-recoveries can't be sustainable over a more extended period.

After a decline of 2.6 per cent in April, the market witnessed another month where main indices declined by another 2.6 per cent. Currently, India's market cap is below September 2021's market cap, despite seeing many mega IPOs like Nykaa, Paytm, and LIC, to name a few. This shows how the market has moved in a narrow range with a downward bias in the last few months. 

But leading indices do not reflect the pain it has caused investors' portfolios. Most mutual funds and PMS have seen massive wealth erosion, with almost all sectors and market caps coming under heavy pressure. Sector and scrip rotations are happening at a faster pace. There is little clarity on which sectors will lead the next rally as the market is not forthcoming about the signs. 

We believe the market will remain rough for the next couple of months; it should pick its journey upward by October.

I have four main reasons why I believe this will happen:

1. Monsoon to be Above Average

The IMD recently revised its prediction with southwest monsoons at 103 LPA (Long Period Average) for this season. A better monsoon, to some extent, could help ease inflation. Typically, monsoons end by September, and hence by October, the market will have an estimate of food grain production. In addition, a better monsoon means a better rural economy, which would mean improving consumption cycles in the economy.

2. Crude Prices Could Go Soft

Crude oil prices are on the rise again. But with slower economic growth across the world and higher OPEC output, I sense that oil prices could start softening in the next couple of months. In addition, there is a high probability that the Russia-Ukraine war could end. The historical trend suggests that crude usually doesn't sustain $100 per barrel for a longer period. If it does maintain above $100 per barrel, volatility will reduce.

3. FIIS from a Net Seller to Net Buyers

FIIs have been net sellers in the Indian equity market since October 2021. They have sold more than Rs 2 lac crore of the net investment in the last eight months. FIIs can't keep selling at this aggressive pace for a longer period. So, they would turn net buyers at least by September. 

Remember, India is among the fastest-growing economies globally; FIIs will take cognizance of this fact. We strongly believe that FIIs selling is at the fag end. As and when FIIs return, they will come back with a bang. We will see equally strong equity buying with heavy selling that we saw.

4. Valuation

The market has gone nowhere in the last nine months, but India Inc's earnings have improved. For the quarter ended March 2022, India Inc. reported net profit growth of 30 per cent over March 2021. Nifty 50 earnings estimate for FY2023 has been put at Rs 881, which gives projected PE of 18.8x times. That means every correction in the Indian market will make valuations attractive.

In Conclusion

Investors have experienced pain in the last few months. However, they may still need to be patient and endure a couple of months more. But post that, the Indian market could be poised for smart gains.

Just hold on to your equity investment. Don't make any decisions based on fear and emotions. The Indian equity market is creating an excellent base for the next rally. If you wish to ride the rally, ensure you don't settle in haste.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)