Indian stocks have just enjoyed their best month in 23 years – and some analysts say momentum is only building.
The Sensex index gained 8.58% in July, while the Nifty 50 jumped 8.73%.
Incredibly, 26 stocks out of the 50 in the Nifty surged more than 10% over the month.
So what should investors make of the best results since 1999? And which stocks should you be watching?
Let’s break it down:
Foreign investors have returned
When the US dollar began strengthening against the Indian Rupee, foreign investors began removing their funds from the Indian equity markets.
More than $6.3 billion in total foreign portfolio investments (FPI) were withdrawn between October 2021 and June 2022.
However, as the dollar began weakening, those investors began to return. According to India’s National Securities Depositary Limited, nearly $626 million came into the Indian economy from foreign portfolio investors in July.
Assisting with this, was the fact the Indian stock market watchdog (SEBI) allowed foreign portfolio investors to buy all non-agricultural exchange-traded derivatives as well as certain non-agricultural benchmark commodity indices.
Before this landmark ruling, only eligible foreign entities were allowed to invest in Indian commodity markets.
Not only is this expected to improve inflows, but it should also enhance liquidity and market depth. Also, the participation of foreign portfolio investors in exchange-traded derivatives markets should promote efficient price discovery.
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, says it was clearly a turning point.
“There is a complete reversal of FPIs activity in the Indian stock market,” he said.
“FPIs who were relentless sellers in the Indian market from October 2021 to June 2022 turned net buyers in July, and the buying continues in August, so far.”
Indian Rupee concerns could ease
The Indian Rupee’s (INR) free fall over the past few weeks has raised concerns.
However, the Reserve Bank of India has announced it is planning to settle international payments in the Rupee, which could buffer this impact.
It is expected India’s dollar demand might fall, making the currency relatively resilient to dollar fluctuations.
Also, it will most likely improve trade settlement with India’s biggest trading partners, as well as raise the demand for the INR in the medium term.
Impact of interest rates
The Indian stock market is currently demonstrating a directly proportional relationship with interest rates, unlike its Western counterparts.
Indian equities surged after the RBI hiked the repo rate by 50 basis points for the third consecutive month last Friday.
The rising domestic interest rates have piqued foreign investor interest once again as Indian Rupee gains traction against the U.S. dollar.
This, coupled with moderating domestic inflation data and other macroeconomic data, has supported equities over the past month.
Also, the worse-than-expected U.S. GDP data but strong labor market have driven investors to prepare for a more aggressive rate hike outlook, which, in turn, is expected to hurt U.S. equities.
So far, India has been a promising emerging market for foreign investors, given its immense upside potential as one of the fastest-growing economies in the world.
Indian stocks to watch in 2022
ITC
Though the equity markets have turned around over the past month, the recessionary concerns are still rampant. Investing in safe-haven, fast-moving consumer goods (FMCG) stocks such as ITC Ltd. (NSE: ITC) can hedge the market risks substantially.
ITC hit its 52-week high on August 1, 2022, indicating a 40% increase year-to-date.
Analysts expect the stock to hit fresh highs in the near term, as major brokerage firms predict a more than 10% upside within the next 12 months.
ITC’s impressive stock price performance is backed by strong financials as well. In the fiscal first quarter that ended June, the company’s revenues jumped 41% year-on-year. Net profit improved 38% year-on-year.
This comes as the demand for ITC’s staple products remained strong despite the market weakness, beating most estimates. Its cigarette segment sales volume surged 25% in the last quarter.
Furthermore, strong pent-up travel demand is expected to allow the company’s hotel business to recover in the upcoming months.
Also, ITC stock is a major hit among dividend investors, given its handsome 5% yield.
Reliance Industries
Reliance Industries Ltd. (NSE: RELIANCE) is one of the biggest conglomerates in India, dominating the domestic refining and telecom businesses.
The company jumped 51 places to rank #104 on the Fortune Global 500 list and the stock is up more than 7% year-to-date.
The company’s consolidated net profit soared 46.3% year-on-year in the fiscal 2023 first quarter. This can be attributed to a 54.5% rise in revenue from operations, as energy, retail, and telecom verticals reported strong performance.
Though Reliance missed the consensus EBITDA estimates, analysts expect at least a 10% upside in the stock. Major brokerages, including Emkay Global Financial Services, JM Financial, and Sharekhan, have a “Buy” rating on the stock.
Reliance’s growth doesn’t stop here. The company is investing heavily in the 5G spectrum to solidify its leading market position in the world’s second-largest mobile market. Reliance is the biggest spender in India’s $19 billion 5G spectrum auction, bidding roughly $11 billion over 20 years.
For its retail vertical, Reliance recently signed a long-term franchise agreement with Balenciaga, making it the sole Indian partner to launch the brand in the country.
Indian stocks forecast
The Indian equity market is expected to maintain upward momentum in the near term, as the declining global commodity prices and easing macroeconomic headwinds pave wave way for a bull run.
Easing inflationary pressures are expected to boost domestic consumer spending as well in the near term, as India’s consumer price index hit a five-month low of 6.78% in July.
Regarding this, Sneha Poddar, AVP, Reserve, Broking & Distribution, Motilal Oswal Financial Services, said in an interview, “The trend might continue as strong macro data, steady earnings, softening of commodity prices and healthy progress in monsoon lends support to the Indian economy.”