Markets fall for 2nd month in row; Sensex, Nifty50 down 2-3% in May; auto defies weak trend, up over 5%

For the second straight month in May, the Indian markets continued their falling streak as both benchmark indices – Sensex and Nifty50 – slipped between 2-3 per cent last month. In April, the frontline indices were down between 3-4 per cent, however, they had gained 5-6 per cent during March 2022. 

The broader markets underperformed the benchmarks as the BSE Mid-cap slipped over 4 per cent, while BSE Small-cap declined over 6 per cent in May 2022. Similarly, Nifty Bank, a key contributor to Nifty Index, also tumbled by almost 1.5 per cent in the previous month. 

Among all sectoral indices, Nifty Metal reported the biggest correction in May, down by over 15 per cent. The sector was mainly dragged by steel heavyweights such as JSW Steel and Tata Steel each down by around 23 and 18 per cent respectively in the last month. 

Followed by Metal, Nifty Realty was the second most corrected sector, down by almost 8 per cent in May. Similarly, other sectors such as Pharma, Media, and IT plunged between 5-4 per cent in May. While Financial Services were marginally down by nearly 1 per cent in the last month. 

Despite the weak market, Nifty Auto, defying the trends, gained over 5 per cent, led by Maruti Suzuki up over 5 per cent from heavyweights and Ashok Leyland up nearly 9 per cent in the earlier month. Even Nifty FMCG joined the gaining rally as the sector surged by around 1 per cent in May 2022. 

The markets have been consolidating for a long due to macro headwinds in the form of high inflation and the US Fed’s policy normalization, said YES Securities. It believes that Nifty50 EPS for H1 FY23 could see some cuts as higher prices may impact volumes categorically in Q1FY23.  

Given that markets are forward-looking, YES Securities believe likely base formation is likely in Nifty around the 15600-15800 zone.  

Valuation contraction has happened across the board and the brokerage believes the time is right to cherry-pick large-cap names which are showing earnings momentum and are available at a reasonable valuation when compared to the historical averages.  

YES Securities prefer financials, rating agencies, IT companies like Wipro which is due for a buyback, and discretionary names like Jubilant Food and Tata motors. 

At the current point, the market seems to be a stock picker, says Rahul Shah-Co-Head of Research, at Equitymaster, where companies showing earnings growth and improvement in fundamentals will be rewarded whereas the ones with a lot of debt and exorbitant valuations will be punished.