Global markets recovered; China leads the rally
- Global markets recovered MoM. U.S & Indian markets continued their bearish trend for the second consecutive month. Indian benchmark indices Nifty 50 and S&P BSE Sensex declined by 3 percent and 2.6 percent, respectively. This was the steepest fall witnessed by both indexes since February 2022, when the stocks plunged in the wake of the Russia-Ukraine war. Soaring inflation, high crude oil prices, and consistent selling by FPIs were primarily the reason for market fall. Even U.S. market indices decline because of all-time high inflation rates, worse-than-expected corporate earnings & economic data.
- China leads the rally this month on the back of optimism around economic growth & stimulus measures announced by the government. Consumer & technology stocks lead the rally. The Singapore – Strait Times ended lower following mixed performances from the financial shares, property stocks, and industrial issues.
- The market performance is likely to be range-bound, and we could see reactions in both directions.
All marketcap indices continues to tumble
- In May 2022, Sensex and the Nifty-50 index fell by -2.6% and 3.0%, respectively. Amid the current volatility, the decline in the mid-cap and small-cap index was sharper. BSE Midcap index and the BSE Small index corrected by 5.2% and 7.8%, respectively. Market valuations decreased further. Price-to-earnings multiple of the Nifty 50 declined from 22 times in April 2022 to 20.4 times in May 2022, and that of the Sensex shrank from 24.6 times to 22.5 times.
- The mid-cap and small-cap index underperformed amid increased headwinds to equity markets from geopolitical conflict, a sharp rise in oil prices, and increased inflation risk. Geo-political tension and high commodity prices can keep the equity markets volatile in the near term. The focus should be on long-term investment in quality large-cap and mid-cap stocks with solid earnings growth and valuation comfort.
The automobile & FMCG sector gave positive returns despite heavy selling in the market overall
- The Automobile sector was the biggest gainer in May’22 as automobile companies gradually overcame constraints like the chip shortage, weak demand, etc. The gross margin of auto companies may improve as the government has introduced the duty on steel exports. It may also translate into an earnings upgrade.
- Some buying has also been seen in large FMCG companies with good pricing power, which has helped the index deliver positive returns. The government imposing export duties on iron ore and steel pellets deteriorated the sell-off in metals, which hit heavyweights like Tata Steel, JSW Steel, and Hindalco badly.
- Sector rotation will be the key theme in such a market, and traders will try to leverage it by playing bottom-ups in stocks with good market share & excellent pricing power.
Gold prices in global markets fell sharply
- Gold prices fell sharply as investors were concerned about a potential recession caused by monetary tightening.
- The yellow metal is an inflation hedge. But, the rise in US treasury yields has reduced its appeal. Higher short-term US interest rates and bond yields increase the opportunity cost of holding gold, a zero-yield asset.
- Gold has discounted an aggressive rate of hike trajectory for this year. Fed is expected to raise the rates by 50 bps when they meet in June & July. Hence the upside in gold can be capped by the future interest rates rise.