Indian markets saw the second worst monthly drop in 2022; yet ahead of global peers

Benchmark indices ended lower on Monday after a strong close in the prior session. The Nifty50 ended with a loss of 201 points, or 1.18%, at 16,892.45, while the Sensex closed at 56,788.81, down 638 points, or 1.11%. 

In September the Nifty and Sensex fell 3.74% and 3.54%, respectively, marking their second-worst monthly performance in 2022 after both indices fell nearly 4.70% in June. The Nifty falls 664 points to close out September at 17,094.35 while the Sensex lost 2,110 points to shut at 57,427.92. 

Despite a sharp sell-off in the last two weeks of September which caused the Nifty to end in the red, it gained more than 8.40% in the second quarter of FY23, largely because of rallies in banking stocks amid strong credit growth.

Due to growing concerns about a recession, ongoing rate hikes from major central banks, and difficulties posed by rising inflation, Indian equity markets have failed to continue their bullish trend in September after rising 8.73% in July and 3.50% in August. So far in 2022, July has been recorded as the best month for markets since August 2021 and November 2020.

The Nifty crossed the 18,000 mark twice in the previous month but failed to hold that key level. At 16,900 the Nifty is 8.24% below its all-time high, which was reached in October 2021 at 18,418.75. The Sensex is also 7.98% below its previous record high of 61,716.05.

Out of the 50 stocks in the Nifty50, 36 finished in the red, with Tata Motors being the biggest laggard in the past month, and 14 finished in the green, with Bharti Airtel being the top gainer.

In September, Nifty Energy stood as the worst performing index with an 8.89% loss, followed by Nifty Realty which sheds 8.57%, and other sectoral indices including Nifty IT and Nifty Auto drop 5.10% and 3.58% respectively.

After two consecutive months of buying, FPIs became net sellers in September and withdrew ₹12,000 crore from Indian markets amid rate hikes from the US fed and a sharp depreciation in the Indian rupee. FPIs made investments totalling ₹51,200 crore in August, up from ₹5,000 crore in July. Before that, FPIs were net sellers in Indian equity markets for nine months in a row beginning in October 2021.

Meanwhile, crude oil prices tumbled 9% in September, marking a fourth consecutive monthly loss and on track to post their first quarterly loss since the first quarter of 2020, down over 20% since the end of June and a 40% drop from the highest level in March.

The Indian Rupee, on the other hand, rebounded to 81.5 against the US Dollar from the all-time low of 82 hit on September 28. In the last month alone, the rupee lost 2.54% of its value.

Besides, U.S major indices, Dow Jones Industrial Average fell below the 29,000 level for the first time since 2020, and the S&P 500 had its worst monthly performance in September since March 2020.

Other major Asian indices including the Nikkei 225 dropped 7.86%, the Topix also dipped 6.48%, South Korea's Kospi lost 12.80%, and the Kosdaq shed 16.65% in September. The major European indices, the Dax, the CAC40, and the FTSE 100, have dipped 5.61%, 5.92%, and 5.35%, respectively.

The Federal Reserve of the United States, the Bank of Canada, the Bank of England, the European Central Bank, and the Reserve Bank of India raised interest rates by 195 basis points in September.

The US Fed delivered a third straight three-quarter point increase in September, pushing borrowing costs to the highest level since 2008 and signalling that they will keep rising well above the current level. The Bank of Canada raised the target for its overnight rate by 75 basis points (bps), to 3.25%, and the BOE hiked its key interest rate by 50 basis points. The RBI raised interest rates by 50 basis points (bps) to 5.9%.

MSCI India Index beats the MSCI China

Chinese stocks have been sliding since the start of 2022 due to its Zero COVID policy, property woes, geopolitical tensions, and an energy supply crunch. The Shanghai composite fell 5.55% in September and lost 11.4% in the second quarter of FY23.

While this has provided an opportunity for India in terms of investment flows, the MSCI India Index rallied almost 10% in the September quarter, compared with a 23% slump for the MSCI China Index. The 33 percentage point outperformance by the India gauge is the biggest since March 2000, according to a Bloomberg report.

The big divergence between the two stock markets started to take place in February 2021 as tightening liquidity conditions in China contributed to the unwinding of a two-year rally in equities. Indian stocks, meanwhile, kept hitting record highs thanks to an unprecedented retail investing boom.

The aggregate market value of firms included in the MSCI China Index has dropped by $5.1 trillion, the lowest level since July 2016. The MSCI India Index, on the other hand, added about $300 billion and hit a record high this year, the report said. 

India, long dubbed the "next China," has become an attractive alternative with economic growth that’s forecast to be the fastest in Asia.

Market veteran Mark Mobius has allocated a higher weight to India than China since the start of this year. Jupiter Asset Management says some of its emerging-market funds have India as their largest holding. M&G Investments (Singapore) Pte has made a "greater allocation" to India in 2022.

Money managers say that India’s expanding domestic market can weather a looming global recession better than most other emerging markets. In the longer term, China’s decoupling with the US may also pave the way for Indian firms to boost their presence worldwide, said Bloomberg. 

To be sure, months of outperformance have made Indian stocks the most expensive in Asia on an earnings-based valuation. This has drawn caution from some investors, with the Reserve Bank of India’s interest rate hikes also a factor that could weigh on the market outlook. 

Indian economy is a lot more decoupled from the global economy

On September 21, global rating agency S&P said that even though the US and the Eurozone are headed into recession, India is unlikely to face the impact given the "not so coupled" nature of its economy with the global economy, PTI reported.

"The Indian economy is a lot more decoupled from the global economy than we normally think of, given its large domestic demand, even though you (India) are a net importer of energy." "But you have enough forex reserves on one hand, and your companies have managed to maintain healthy balance sheets," Paul F. Gruenwald, S&P global chief economist and managing director, told reporters.

In addition, the Organization for Economic Cooperation and Development has retained India's GDP growth projection at 7.3% for the financial year 2022–23. The Indian economy expanded by 13.5% in the April-June quarter, sequentially higher than the 4.10% in the January-March period.

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