Market Rally: Is July rise an aberration? Analysts have opposing views

After three months of downturns, Indian benchmark indices bounced back with nearly 9 percent returns in July 2022. It was the best month of the current financial year FY23 as well as of the calendar year 2022. The gain in July also turned the Indian markets positive for 2022 YTD.

Flattening of inflation, softening of commodity prices and pickup in monsoon improved investors' sentiments. In addition, FIIs tuning positive in July for the first time since October 2021 also gave cheers to the investors.

In July, the inflation concerns eased and expectations of fewer rate hikes from the US Federal Reserve (Fed) helped cool off bond yields and improve portfolio flows, which further helped the market turn positive.

In addition to that, the Nifty 50 outperformed major global indices in the last month with the exception of the US.

But was the surge in July an aberration or is this recovery here to stay? Different experts have different outlooks on the same.

Let's start with the bullish view.

Sunil Damania, Chief Investment Officer, MarketsMojo believes that this is a moot question. He believes that July's gain is not an aberration. So now is the time if you are still waiting for an opportune moment to enter the stock market, he advises investors.

"July's rally helped reinstate the gains that investors eagerly awaited after seeing a steady portfolio bleed over the months. But then again, this is how the market operates -- it frustrates you and suddenly changes trajectory. There were talks in July that the Nifty would touch 14000, but now no one talks about the Nifty touching the 14000 levels," Damania said.

There are 3 reasons for his positive outlook. Firstly, he believes that FIIs are returning and are here to stay this time. But why?

According to Damania, this is because of India's strong economic growth. IMF has revised India's GDP growth, but India will still be the fastest-growing large economy in the world.

"And if the economy grows, India Inc.'s earnings would also increase. And with a rise in India Inc earnings, FIIs would look to chase the growth story. Given favorable conditions, FIIs will have every reason to return to the Indian equity market as they look to invest in countries that can help them generate alpha on the portfolio. Despite FIIs selling heavily in the first six months of 2022, we believe FII investments would be positive for 2022," he explained. He sees FIIs investing more than what they sold in the second half of 2022.

Secondly, he noted that Southwest Monsoon has progressed well which should further help boost the rural economy and cut food inflation. And finally, he pointed out that while the world has been struggling with inflation, India's inflation numbers are declining. With crude prices diminishing, various other commodity prices are also declining and supply-side concerns easing, it will release pressure on inflation, he said.

Meanwhile, another brokerage HDFC Securities also pointed out that despite all the volatility in the economic data, the stock market is not scaring off many retail investors, highlighted the brokerage. People appear to be keeping the lessons of the pandemic-induced stock market drop and subsequent resurgence in 2020 at the front of their minds, it noted.

For August 2022, the brokerage house feels that the Nifty could broadly track the trends in the global markets and remain in the 17,700-16,100 band. The most pressing issues are the effect the economic slowdown will have on corporate earnings and the risk of the Federal Reserve over-tightening, it added.

Now let's become the devil's advocate and see why this rally may not be sustainable.

Brokerage BofA Securities, on the other hand, believes that there is more pain in store for investors in Indian equities and expects the benchmark indices to correct another 10 percent by December. It sees Nifty at 15,600 points by December 31, 2022.

However, when compared to the brokerage's own call in June, this is an upward revision of the target because it had previously estimated the Nifty at 14,500 points.

Here's why

It can be noted that the markets have seen some buying lately with the return of foreign portfolio flows, after a sustained sell-off which saw the foreign portfolio investors pulling out over $29 billion, said BofA.

But it still remains cautious on markets on the back of the current volatile environment and looming global recession concerns as reflected by consensus downgrading Nifty FY23/24 earnings.

While it sees risks of further earnings cut, the brokerage also noted that there are some positives like moderations on high crude prices, rupee depreciation and domestic inflation.

Meanwhile, Nirmal Bang also believes that while the recent up-move has taken the valuation to the upper end of the Pre-Covid level, markets are likely to revert back to pre-Covid levels.

"Though it went up very high last year, we feel considering the status of the world economy, increasing interest rate environment and increasing downgrade of corporate earnings by analysts, the valuation range will revert back to pre covid level," it predicted. The current valuation leaves limited scope for further up-move from the current level, added the brokerage.

Strategy

Going ahead markets will carefully look at inflation numbers and monsoon progress. While monsoons help boost the rural economy, it will also help to understand the trajectory of inflation.

Damania believes that when investing in the equity market, one must have a three-year to five-year horizon.

“We believe the market is very close to the bottom if it has not formed yet. Hence, we do not expect a substantial downside hereon. Most importantly, Nifty can go to 16000 levels but will not remain there for long," predicts Damania.

Market sentiments by October 2022 (around Diwali) would be more jubilant than it is currently, he added.

Meanwhile, BofA said that it is underweight on stocks in the external/export-driven sectors such as materials and select discretionary, and neutral on the information technology sector.

Meanwhile, it is "constructive" on companies in the domestic cyclicals and consumption space, and "overweight" on industrials, financials, autos and staples.