INDIAN MARKETS OUTPUTS MOST GLOBAL COUNTERPARTS IN JULY, AIDED BY MUITIPLE FACTORS

 Healthy corporate earnings, coupled with the return of foreign institutional investors, aided the positive sentiment.

Indian equity markets outpaced most global markets other than the Nasdaq in July, buoyed by declining commodity prices, expectations of a normal monsoon and the return of foreign investors. Expectations that central banks globally would adopt a softer policy stance after raising interest rates to cool inflation also helped.

Both the BSE Sensex and the National Stock Exchange's Nifty rose over 9.5% each in July, in dollar as well as local currency terms, according to Bloomberg data. Nasdaq Composite index rose nearly 12% in July.

In July, the S&P 500 rose 8.1%, the Nikkei 225 advanced 6.1%, the Straits Time Index jumped 5%, and the Dow Jones Industrial Average and CAC 40 gained 5% each. Ibovespa Brasil and FTSE 100 rose nearly 5% each while the Philippines and Korean stock exchange benchmarks rose 3% each. Deutsche Boerse AG, FTSE Bursa Malaysia, Jakarta Stock Exchange, South Africa Top40 and Thailand advanced between 1-3% during the month. Hong Kong's Hang Seng, and the Shanghai and Taiwanese equity market benchmarks dropped between 2% and 10% in July.

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"The sudden surge is led by healthy results, softening commodity prices, expected normal monsoon coupled with FII (foreign institutional investor) investment. Over 25% correction in crude prices from the peak level provided major relief to many economies and increased investor confidence in equities,'' said Mitul Shah, head of research at Reliance Securities.

The return of foreign investors, who had been on a selling spree since October 2021, also improved sentiment. FIIs have sold around $28 billion so far this year and over $30 billion since October in Indian equities. They started buying in July, purchasing $650 million of shares. Indonesia, Japan, Malaysia, South Korea, Thailand and Vietnam also got positive FII inflows of between $100 million and $3 billion in July, according to Bloomberg.

So far, most reported corporate earnings have been in line with analysts' estimates in the June quarter. Analysts said 45% of NSE 500 companies have declared 1QFY23 results so far with strong 35% Year-on-Year (YoY) growth in revenue.

Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and net profit grew by 21% YoY and 20% YoY, respectively. The growth was driven by cyclical sectors like banks, capital goods and consumption. The contraction was driven by sectors like metals, information technology (IT) and cement. In terms of expectations, there have been more beats than misses.

"One of the major reasons for the sudden surge in the markets can be attributed to better-than-expected earnings led by strong domestic demand and weak 1Q22 base due to the 2nd covid wave. Corporate profits increased as operating leverage helped neutralise the impact of higher input costs to quite a good extent…any upgrades in NIFTY earnings will further provide support to the markets in coming weeks," said Amnish Aggarwal, director of research at Prabhudas Lilladher.

Aggarwal said he remained structurally positive on the India story and believes the worst is over for Indian markets. Supported by strong domestic demand, India will shine brighter than its global peers both in the near and long term, he added.

"Declining inflation is improving the margin outlook for domestic corporates due to a descent in input costs. Earnings performance is expected to improve as demand continues to be robust along with expansion in margins. Given this scenario of the prospect for earnings growth and valuation appreciation, the market can remain bullish in the medium term," said Vinod Nair, head of research at Geojit Financial Services.

Analysts are cautious ahead of the Reserve Bank of India's bi-monthly monetary policy due on Friday amid expectations that the central bank would hike policy rates at a slower pace. RBI has increased the repo rate by 90 basis points (bps) in two policy announcements so far. One bp is one-hundredth of a percentage point.

Analysts say a 25 bp hike will indicate that inflation has peaked and although still high, will not accelerate significantly. An aggressive move of around 50 bps will indicate that inflation has not yet peaked and will act as a signal to the markets, analysts added.