Nifty up 14% in 6 months: Key triggers behind the world-beating rally

Nifty50 in the past six months has shown a solid up-move of ~14%. India has been amongst the best-performing markets globally. This renewed optimism surrounding the Indian markets is due to a variety of factors. Being a domestically oriented economy, falling raw material prices and favourable high-frequency indicators are some of the factors that favour India. Taking cues from the just concluded September quarter earnings season, we will try to understand key interesting observations.

The September quarter gone by has been an overall mixed bag with a little towards the positive side. But it appears that the worst of the problems is behind us and the wounds are healing faster.

It was observed that although the rural economy is gradually getting back on track, it is not translating to an increase in demand. This is mainly due to high inflation and slower income growth. However, adequate soil moisture and reservoir levels should result in a good rabi harvest, aiding the farm income. Additionally, a constant decline in the price of food and fuel would offer relief to rural India.

The volume growth in FMCG and auto was impacted due to the stress in rural income. The tide turning in favour of rural demand would provide a big impetus for these industries.

Sectors like FMCG, IT, Industrials & Media continue to face margin pressure but are showing strong signs of revival. The leading commodity prices like Brent Crude, Steel, Coal, Aluminum & Palm oil have significantly corrected from their peak. Also, the attrition in IT companies is stabilizing. These factors would aid margins for these segments.

Among the indices, the Nifty Bank has registered the biggest increase in its profitability. The buoyant loan growth, margin improvement, and lower provisions have aided the profits. With the macro environment in favour, the banks are expected to continue to perform effectively.

The net interest margins (NIMs) of banks are near their peak as banks would be increasing their deposit rates to support deposit growth. However, as the terminal rate is yet to be reached, the margins are expected to remain at similar levels. In addition, the corporate credit demand is expected to remain elevated and aid credit growth.

Apart from banks, the Capital Goods sector appears in a sweet spot. The segment will be benefitted from the government capex and expected pick-up in private capex. The strong order book in the September quarter signifies the same. The scenario of declining inflation should bode well for maintaining margins in the manufacturing sector.

Auto and Auto Ancillary is another sector that appears attractive. The comeback of demand, cooling commodity costs, and easing supply constraints make the route appear less bumpy for the Auto OEMs and Auto Ancillaries.

Nifty currently trades at a P/E of 22.2x which is trading closer to its historical average P/E of 21.2x. From this point forward, earnings delivery and macroeconomic stability will be required to support the gain. Taking into consideration the observations mentioned above the momentum in Nifty is expected to sustain.

Technical Outlook

Post two weeks of consolidation Nifty finally breaks its narrow range consolidation and is continuing its prior uptrend. The tall bullish candle on the monthly expiry day has suddenly changed the momentum of stocks from sideways to bullish. In the recent minor throwback, prices have taken support near their 21-day exponential moving average and an instant rebound was seen post that. Now the rule of polarity will be applied in Nifty where prior resistance will act as immediate support for the market. On the technical ground, the support for the index is placed near 18250 and any move below the same will extend the fall till 18100 levels. Similarly, on the higher side, 18650 will be the immediate resistance followed by 18800 levels. Nifty 50 closed the week at 18512, up 1.12%.