Let me start this blog with what I wrote last month. In my previous write-up, I had stated that the risk-reward ratio had favored reward.

Here’s the exact reproduction of my statement, “…the market’s behavior in June gave me the impression that the market has either formed the bottom or is very close to the bottom. The risk-reward ratio has turned in favor of reward.”

I also stated in the same piece that FIIs would turn net buyers. Once again, here are my precise quotes, “FIIs have been net sellers in the Indian market – the ninth month in a row, the longest since 2008. Overall holdings of FIIs in India Inc have come down to below 19 per cent. We believe FIIs will turn Indian equity net buyers by July or August.”

At the time, I had requested investors to increase their equity allocation if they were undecided. If you have yet to do so, it’s still not too late. I believe that Diwali’s market mood will be more jubilant than now.

July Witnessed Across the Board Rally

The market in July turned out to be one of the best months as the Nifty and Sensex surged by 8.5 per cent. The rally was seen across the board as both mid and small caps participated. Almost all sectors were in the green.

The rally has brought back gains in the first six months, with the Nifty and Sensex touching almost 2021 levels. This is how the market behaves. First, it frustrates you, and then suddenly, it surges, wiping out all losses.

What Caused the Sudden Change in Sentiments?

During weak market sentiments, bad news tends to push down the market. But this time, the bad news did not impact feelings.

Let me cite three examples. First, on 26th July, the IMF lowered the world GDP growth rate by 40 basis points to 3.2 per cent for 2022. For India, GDP growth has been lowered by 80 basis points to 7.4 per cent.

But the Indian market rose on the following day. On the next day, 27th July, the US Fed hiked interest rates again by 75 basis points. The market extended the rally, with the Sensex surging by more than 1000 points. Following the Fed rate hike, the US economy indicated it had contracted second quarter in a row by 0.9 per cent.

In the first quarter, the US economy contracted by 1.6 per cent. But the Indian market, as well as the US market, surged.

Why Did the Disconnect Occur?

The market reacts negatively only when news is worse than expected. For example, the market had factored in the IMF’s lower GDP growth rate, the Fed rate hike of 75 basis points and the US economy’s contraction.

Since outcomes aligned with market expectations, the market had no reason to react adversely. The market reacts negatively only when it receives worse than anticipated news.

The Upward Movement Deconstructed

In the last few months, many issues have bothered the equity market. There were repeated issues (also known as poly crises) such as higher inflation, higher interest rates, a never-ending pandemic, the Russia-Ukraine war, supply-side constraints, heavy FII-selling and a falling rupee against the dollar.

But these factors have begun petering out.

For India, inflation has started nudging downward. CPI inflation has decreased for two months in a row; it was 7.79 per cent in April, which was reduced to 7.04 per cent in May, and for June, it further came down to 7.01 per cent.

Commodity prices, including crude oil, have begun decreasing, which should help inflation stay under control. As mentioned in my last blog, I expect inflation to be below 6 per cent before the end of 2022. The RBI, in turn, is not likely to get aggressive with rate hikes, and I expect not more than one rate hike.

In the US, experts have begun to speculate that the Fed will start to lower interest rates by the first quarter of 2023.

After heavy selling in the last nine months, totalling 2.50 lac crores, FIIs have turned net positive in India by pumping Rs 5000 crore in July. We expect FIIs to remain constructively positive in the Indian equity market and further predict them to be net buyers in the second half of 2022.

In other words, poly crises have now turned into poly reliefs. India Inc numbers for the June quarter have turned out to be reasonable, with YOY growth in sales of 32 per cent and net profits by 25 per cent. While this is on a lower base, GST collections are robust, suggesting the economy is growing strongly.

Southwest Monsoon has progressed well with 8 per cent above normal range until 31st July. That should further help boost the rural economy and cut food inflation.

Time to Align Your Strategy

Equity is never about investing for a week or month. It’s all about 3-5 years to create wealth. Almost every investor has suffered deep losses in the last few months — from PMS to Mutual funds and those managing independently. The time has come to gear yourself for the bull run in the coming quarters.

The market will intermittently have its share of downside but will not sustain it for long. As mentioned in my last blog, I am reiterating that the risk-reward ratio has favoured reward. It’s time to choose greed over fear.