Indian equities turn volatile in September on back of negative global cues –
Indian equities turned volatile after rallying for three months in a row with the
benchmark Nifty down by 1.2% for the month as FII flows turned negative. FII
outflows for the month stood at `7,783 crore after record inflows of `47,078
crore in August 2020. Markets were also impacted by negative global cues in the
second half of the month due to a surge in infections in Europe and failure on the
part of the US congress to make any significant progress on the second US
Domestic economy improved sharply in September led by manufacturing–
The economy continued to improve in September which was reflected in high
frequency data like Auto sales and PMI numbers. The manufacturing PMI for
September pointed to very strong rebound in manufacturing as it improved to
56.8 in September from 52.0 in August. This is the highest reading for the
indicator since January 2012. The reading was driven by majority of the
component including new orders, production, export sales, input stocks along with
an improvement in business confidence. Auto companies reported another month
of strong sequential growth with Maruti Suzuki reporting a 30.8% YoY increase in
August domestic sales as compared to a 17.7% and 1.1% growth in August and
July respectively. Hero Motocorp also reported a very strong growth of 16.9%
YoY growth in motorcycle sales for the month of September.
Further easing of restrictions post unlock 5.0 along expected lines - Unlock
5.0 carries forward the momentum from unlock 4.0 with the Government
announcing significant incremental relaxations. Unlock 5.0 has mostly been along
expected lines that the Government will keep reopening the economy gradually
as the Covid-19 situation keeps improving. Due to lockdowns in April and May
there is pent up demand which along with inventory buildup prior to the festive
season and continued opening up of the economy should lead to further
improvement in economic activities over the next month or so.
We expect sectors with revenue visibility will continue doing well will rally
in cyclical sectors also expected to continue– We expect the rural, essential
and digital theme to continue playing out over the next few quarters given
revenue visibility and strong growth prospects. We therefore continue to maintain
our positive outlook on sectors like Agrochemicals, IT, Telecom, Two wheelers
and tractors. We also expect the rally in cyclical and beaten down sectors to
continue for some more time given continued improvement in the economy.
Within the recovery theme we believe that sectors like low ticket consumer
durables, cement, and multiplexes should do well.
Key risks which can derail the recovery rally are 1) Surge in infections as the
economy is opened up further 2) Delay in vaccine production as compared to
timelines expected by markets 3) Failure of the US Government in passing the
second stimulus bill leading to volatility in global markets.