Global volatility to drive markets in the near term

Global volatility

• Globally, the epic centre of the recent sharp fall in equity markets including India is the global bond market. During the week, U.S. 10-year bond yield crossed 4.0% mark for the first time in 12 years reacting to previous week’s rate hike and hawkish commentary by U.S. Federal Reserve. Rising expectations of higher terminal rate in U.S. from less than 4.0% to 4.5-4.75% in last one week has led to current further sell-off in bonds.
• U.S. 10-year yield had risen sharply from 3.5% at the start of the week but saw some moderation in the later part of the week towards 3.85% as BOE announced emergency measures to buy Government bonds. Yields have now moved up by around 1.5% in last 2 months from 2.5% in first week of August 2022 to 4.0% this week.
• Bond buying measures by few other central bankers/Governments similar to BOE may not be ruled out as implications of sharp rise in yields are grave ranging from general investment losses to systematic risk for select sectors (Insurance companies) to higher cost of funds leading to business unsustainable etc.

Indian Markets

• Indian equity benchmarks corrected for third week in a row amid global volatility and currency depreciation
• Nifty corrected 7.5% over past ten sessions rendering prices to extreme oversold conditions and in the process tested its key 200-day EMA (16850)
• In the upcoming truncated week, we expect Nifty to witness technical pull back from oversold readings with key support placed at 16500 levels. Use dips to buy amid volatility for target of 17300
• India VIX has corrected 2% for the week, despite Nifty correcting 3.5% during the week indicating that market participants are not expecting major turmoil in the near term
• Seasonality: Historically, September has been a volatile month. However, over past two decades, Q4 returns for Nifty has been positive (average 11% and minimum 5%) on 70% of the times. The history favours buying dips from hereon
• Relative outperformance: Indian equities continued to relatively outperform global peers while pricing in many negatives. While most global equity benchmarks have tested June lows, Nifty is 10% away from June lows
• Sectorally, Consumption and BFSI are expected to lead recovery while Auto, capital goods and select Pharma stocks provide re-entry opportunity post recent decline
• In large caps, Indusind Bank, Bank of Baroda, Reliance, Bajaj Finance, Titan, Britannia, TCS, Sun Pharma, Maruti Suzuki are preferred
• In midcaps, ABFRL, Lemontree, Schneider Electric, Mazgaon Dock shipbuilders, Gabriel, Granules, Havells, KPIT Technologies 
• Nifty has started the October series with 6 month high open interest at inception. Weak global cues have triggered fresh shorts in Index futures and we believe any short covering trend should be expected only if Nifty sustains above 17200.
• Among heavyweights, Kotak Bank and Reliance along with stocks from the realty space have seen aggressive short accumulation. A short covering move can be expected if these stocks sustains above their call bases at the same time, despite continued under performance Technology stocks hasn’t seen any gradual build up of short positions.
• The out performance of India vs global peers faltered further last week and FIIs have aggressively sold Indian equities. During the week itself, FIIs have liquidated equities worth | 16,000 crores. Despite the buying of more than | 13000 crores by domestic institutions, Nifty lost more than 2% as FIIs selling was more concentrated towards index heavyweights. With recent selling, FIIs have turned net sellers in Indian equities for the month as well.

RBI Policy, Indian bond markets are also outperforming global bond markets

1. Rate hike by RBI by 50bps was on expected lines and even the borrowing calendar was largely as per market expectations.
2. Inflation estimate for FY23E maintained at 6.7% with decline in commodity prices and good monsoon cooling off inflation, though imported inflation pressure amplified by appreciating dollar remains a risk.
3. Revival in demand has been consistent among agriculture, industry and services sector, however, geopolitical tension and mounting fear of recession pose a risk to exports. Overall, GDP growth is revised downwards from 7.2% to 7% in FY23E.
4. Focus remains on withdrawal of accommodative stance and calibrated monetary policy action to tame inflationary pressure
5. India’s foreign exchange reserve at US$ 537.5 billion as on September 23, 2022. About 67% of the decline in reserves during the current financial year is due to valuation changes arising from an appreciating US dollar and higher US bond yields. Incidentally, there was an accretion of US$ 4.6 billion to the foreign exchange reserves on balance of payments (BOP) basis during Q1FY23.

Impact on yields

1. 50 bps rate hike, in-line with expectation, have led 10 year Gsec remaining flattish at ~7.3-7.35%. Indian bond yields have also seen some pressure with 10-Year bond yield moving up from 7.1% (second week of September) to 7.35% currently.
2. Economic stability, steady currency and healthy growth opportunity on relative basis could spur inflows in bonds which augurs well for stability in domestic yields in the current scenario. Inclusion of Indian bonds in global index will act as another catalyst for increased inflow in bonds

Overall, just like equities, Indian bond markets have also outperformed global bond markets in terms of stemming the sell-off.

Impact on banks

1. With 10 year Gsec at 7.3% and banks MTM at 7.5%, expect some reversal of treasury losses reported in Q1FY23. The same to lead to a sequential surge in earnings of PSU banks
2. In the wake of increasing competitive intensity on deposits, utilization of excess CRR and SLR for lending to safeguard any negative pressure on margins
3. In-spite of hike of ~190 bps in repo rate, credit demand from retail segment remains buoyant and is expected to remain strong in ongoing festive season. Higher inflation to keep credit demand for working capital abated while capex demand is witnessing gradual uptick
4. NBFC are expected to witness continuous traction in credit demand, though margins could remain under pressure due to elevated cost of borrowing

Monsoon

•  Monsoon activity for the country as a whole has remained in the above normal zone post robust rainfall in July 2022 with cumulative rainfall till date placed at 107% of LPA i.e. 7% above the normal range.

• India is well poised to surpass the revised IMD forecast of rainfall in Monsoon 2022 to be at 103% of LPA.

• Sowing activity has been near normal with acreages down 1.2% YoY on aggregate basis while is down 5.5% YoY in the case of Rice due to muted rainfall in the eastern belt.

• Water reservoir levels are healthy pan India with present reading at 108% of last year levels & 113% of last 10 year average levels. Positive for the upcoming Rabi Crop

Expected Auto Nos

• We expect PV space to report healthy volume prints i.e. high single digit M-o-M volume growth for September 2022 amid new launches in the SUV domain and upcoming festive season. Key outperformance in this space is expected from Mahindra & Mahindra (on the back of commencement new Scorpio deliveries) and Maruti Suzuki.

• 2-W space could witness mix trend wherein commuter segment is expected to report steady performance with positive reading is expected from the premium segment involving the likes of Eicher Motors.

• While CV space and tractors could witness a M-o-M decline due to seasonality.

• On the Exports front, volumes could be subdued given the macro uncertainty as well as currency volatility. So, Bajaj Auto and TVS Motors could report muted volume prints for September 2022.

We remain positive on the auto space given the expectation of double digit volume growth in the near term coupled with benign commodity price outlook leading to healthy margin recovery. Our Top bets are largely domestic oriented businesses with healthy growth prospects namely Maruti Suzuki (target: ₹ 10,000), M&M (target: ₹ 1,590), Eicher Motors (target: ₹ 4,170) and Ashok Leyland (target: ₹ 180) in the OEM space.

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