The domestic market concludes the fiscal year with a vibrant hue. Catalogues like large have provided a return of 33%, Mid of 56%, and Small by 63%, as per the respective broad indexes. However, the year ended on a quieter tone, with substantial selling in March. Over the last two weeks, there was a slight easing as leverage-driven selling halted and buying improved at low volumes.
The global market experienced a favourable trend this month as anticipation grew for an interest rate reduction slated to commence in June. Towards the end of the month, consolidation gained momentum as currency volatility heightened, exemplified by a surge in the US dollar index to 104.7 (composite dollar index compared to developed peer currencies). In the short to medium-term, currency and equity have an opposite relationship. Elevated dollar prices serve as an indicator of risk aversion, prompting increased selling pressure in other currencies.
The recent short-term correction in the global market can be attributed to the unexpected interest rate hike by the BoJ post 17 years and mixed US economic data, which could postpone the interest rate cut from June to July. However, market expects that even if inflation remaining above the long-term target, in the short-term, Fed commentary suggest three interest rate cuts this year. Currently, the probability rate is 65 to 70% of a cut in the June policy. Further, muted financial forecasts like low IT spending in the US would have impacted the global trend.
India’s Mid & Small cap sectors are steadily recovering from their low point reached on March 20th, which marked to oversold territory. It seems that the fallout was mostly triggered by leverage based square offs. DIIs continue to be strong buyers in the month, while FIIs inflows turned muted due to high currency volatility. Emphasis is on large caps and concerns persist regarding inflated valuations in mid and small-cap stocks. The IT sector is encountering headwinds stemming from a global slowdown in IT spending and in anticipation of a weak Q4, upcoming results.
FMCG has been underperforming during the year due to weak rural demand and the high cost of raw materials, a culminative effect of El Nino. Moreover, increased competition from new entrants, including start-ups, has intensified challenges. However, for a long-term investor, we foresee a favourable progression with prospects for the upcoming monsoon season, which leads to an enhancement in agricultural output and an ease in food inflation. Consequently, FMCG companies stand to gain from decreased input costs. Importantly, it is forecast to rejuvenate the agricultural economy, increase farmers’ income, and stimulate rural demand.
Over the past several quarters, the FMCG industry has been facing challenges in achieving meaningful growth in rural demand. This deceleration can be attributed primarily to persistently high inflation rates, compounded by erratic monsoon seasons experienced last year. We anticipate a gradual resurgence in demand as inflation rates decrease. A robust monsoon season in 2024 would further amplify this trend, potentially enhancing profit margins and revitalizing rural demand. The FMCG sector’s performance is intricately linked to climatic patterns, underscoring the importance of a strong monsoon season.
Food inflation has persistently remained at elevated levels since the onset of the last monsoon. This trend is likely to continue in the short-term, during March to June, due to the hotter than average summer season. Hence, FMCG may continue to drift with a mixed bias in the short-term. Climate experts are predicting that the weather patterns are insight to shift from El Nino to La Nina. With the advent of a favourable monsoon, it is anticipated to reverse the course. The valuation of convention players has contracted in the last one year towards long-term average. Accumulation over the next 2-3months should be a good strategy to increase exposure in the FMCG sector.
First published in Mint