The financial markets are currently undergoing what market analyst Ed Yardeni refers to as the “mother of all melt-ups” (MAMU). This phenomenon refers to a sudden and significant increase in the market within a short period of time, in contrast to earlier unfavorable feelings. The NASDAQ gained 32% in the first half of 2023, its highest gain in 40 years. This outstanding performance, combined with all-time highs attained by domestic indices like as the Sensex and Nifty, marks the start of the MAMU moment.

In March 2023, sentiment was so low that many investors wondered how low we could go. Since the low of March 2023 both Nifty and Sensex have risen nearly 18 per cent in just 90 days.

So, Why Are Stock Markets Experiencing a MAMU Moment?

Inflation was a fearful word in 2022. Inflation is currently falling downward all over the world. In India, the CPI came in at 4.25 percent, which is quite close to the RBI’s tolerance level. WPI is in the negative with the latest print at minus 3.48 per cent. CPI in the United States fell to 4%. Most commodities around the world are significantly lower than they were at the start of 2023. Even freight costs are falling, which is helping to keep inflation at bay.

Investors are relieved since lower inflation has been achieved with no negative impact on the economic prospects. The United States’ first-quarter GDP was revised up to 2% (annualised) from 1.3 percent previously. Hard landings are no longer discussed in the United States. The general consensus is that there will be a soft landing.

Taking a cue from declining inflation, the RBI held off on raising policy rates twice in a row. Fed followed the RBI’s lead and chose not to raise interest rates. However, both the ECB and the Bank of England raised interest rates to rein in local inflation. But the overall sense is that pace of rate hike will be moderated, with the possibility of rate cuts in the next 6-9 months.

Will Inflation Be Kept Under Check?

Despite the recent softening trend, chances are that it can take a U turn in the coming months. Many commodity prices are so low that it is unlikely that they will fall much lower. The base effect will also come into play. The Chinese economy is struggling, and in order to revive it, it can announce stimulus (they did decrease rates modestly in June), which will increase demand for various commodities.

Even the price of crude oil is low. Saudi Arabia lowered oil production by 1 million barrels per day last month. With many global economies not slowing down as expected, the demand-supply relationship suggests that crude will likely rise in the second half of 2023, pushing inflation higher. Crude fell 12.5 percent in the first half.

I believe it is too soon to think that we have swayed the inflation demon.

While the Fed did not raise interest rates at its most recent policy meeting, it has hinted that two more hikes are likely in coming months. The market currently expects a rate hike on July 26th with an 87 percent probability. The yield curve in the United States is inverted, raising concerns that the country will enter a recession within the next 12 months. The fact that the recession is likely to be shallow is a plus.

So, How Will the Second Half Of 2023 Play Out?

The Nifty gave returns of 6% in the first half. The recent few years’ tendency suggests that the Nifty gives higher returns than the first half. We forecast that the Nifty would reach 20100 by 2023 end. We continue to maintain the same target, implying another 5% rise in the next six months. However, this journey is likely to be non-linear. Profit booking will occur in several counters, as well as sector rotations. Making money may not be as simple as we experienced in the first half, when the market fell in the first quarter and then rose in the second.

Your Strategy

We have often stated that the Indian equity market is on the verge of a mega bull run. We remain optimistic that Indian market indices will more than quadruple in the next five years. As a result, investors should never be concerned about short-term volatility. Over a five-year period, the Indian equity market has consistently provided favourable returns. FPIs’ continued investment in the Indian equity market despite high valuations demonstrates their belief in India’s long-term growth story. More investors increasing their allocation to financial assets means more liquidity in the market.

So, while the bull can take a breather in the near term, the medium to long term bull run will continue to dominate. MAMU has only recently begun. Don’t be in a hurry to get out of the market.

Note: Investment in securities is subject to market risks. Read all the related documents carefully before investing. Past performance should not be construed as a guarantee for future returns. The securities quoted are for illustration only and are not recommendatory.