Sensex, Nifty gain over 2% in July; large caps offer better risk-reward: Axis MF
Some of the key global risks that weighed on markets earlier in the year have begun to moderate, although uncertainty remains elevated.
While selective opportunities remain available, elevated valuations in certain segments warrant a more disciplined approach to stock selection. (AI Image)
Indian stocks posted a volatile but positive performance in July. Indices started off building on June’s strong performance and were trading close to all-time highs in the first half of the month before investor sentiment turned cautious midway through July. Uncertainty around geopolitical events, shifting global trade scenarios and crude price movements were to blame, said Axis Mutual Fund in its Equity Market Review and Outlook July 2020 report.
Amid these swings, BSE Sensex and Nifty 50 ended the month 2.1% and 2.2% higher. Meanwhile, the broader market indices outperformed with mid-caps and small-caps rising 2.5% and 1.8%, respectively. Sectoral performance was divergent, with technology emerging as the strongest performer on the back of better-than-expected quarterly earnings and an improving global demand outlook, while consumer durables, real estate and automobiles were among the key gainers. On the other hand, capital goods and power witnessed weakness.
Foreign institutional investors turned net buyers during the month, infusing US$2.1 bn in equities and providing an additional boost to market sentiment despite ongoing concerns around crude oil prices and geopolitical developments. Domestic institutional investors poured in US$ 3.6 bn during July.
Global market performance remained mixed during the period. Several ASEAN markets delivered positive returns, supported by improving domestic demand, easing monetary conditions and resilient capital flows. In contrast, technology-heavy markets came under pressure as investors reassessed semiconductor demand prospects, increasing competitive intensity and elevated AI-related valuations. As a result, Korea and Taiwan witnessed sharp corrections given their significant exposure to the global technology and semiconductor supply chain. China, Hong Kong, Brazil and developed markets ex-US outperformed, aided by attractive valuations and improving investor sentiment.
Domestic demand remains resilient despite geopolitical uncertainties and commodity-price volatility, as reflected in the 1QFY27 earnings season. NBFCs reported stronger-than-seasonal business growth and stable asset quality, while FMCG companies delivered healthy volume growth and largely retained their FY27 outlook. Banking trends were relatively mixed, with corporate credit growth continuing to outpace retail lending, deposit mobilisation skewed towards term deposits and margins remaining under pressure from elevated funding costs.
Meanwhile, the investment cycle continues to broaden, led by power generation, transmission, transformers, renewable energy, grid modernisation and defence, alongside healthy demand from industries such as metals, mining, cement, oil & gas and commercial real estate. Data centres are emerging as a significant incremental growth driver, creating opportunities across cooling systems, electrification, water treatment and captive power, while EMS companies are steadily moving up the value chain from assembly-led manufacturing towards ODM, components, exports and other higher-value segments, supported by increasing localisation and a more diversified customer base.
OUTLOOK & POSITIONING
“We believe some of the key global risks that weighed on markets earlier in the year have begun to moderate, although uncertainty remains elevated. Tensions in West Asia have eased following a pause in major hostilities and renewed diplomatic engagement, helping Brent crude retreat from recent highs and reducing immediate concerns around imported inflation, the current account deficit and corporate profitability in India. That said, the geopolitical backdrop remains fragile, and periodic disruptions to energy markets and global supply chains could continue to drive bouts of volatility across asset classes. In such an environment, we expect markets to remain sensitive to developments in commodity prices and geopolitical events,” said the report.
At the same time, global investment trends are undergoing a transition. The strong AI-led rally is witnessing a phase of reassessment as investors evaluate valuations, the sustainability of hyperscaler capital expenditure and the timeline for monetisation. This could support a gradual broadening of global capital flows towards markets with stronger domestic growth drivers, including India. “Meanwhile, uncertainty around the US interest rate trajectory persists, with the Federal Reserve maintaining a cautious stance amid lingering inflation concerns. Despite these external crosscurrents, we believe India’s relatively resilient macroeconomic fundamentals, easing inflation trajectory and broad-based domestic growth drivers position it favourably within the global investment landscape,” the report noted.
Valuation dispersion across market capitalisation segments has become an important consideration for investors. Following a prolonged period of strong performance, mid-cap and small-cap stocks continue to trade at a premium to their historical averages in several pockets, reflecting high expectations around earnings growth and India’s long-term economic opportunities. While selective opportunities remain available, elevated valuations in certain segments warrant a more disciplined approach to stock selection. In contrast, large-cap equities offer a more balanced risk-reward proposition, with valuations appearing relatively reasonable and supported by stronger earnings visibility, robust balance sheets and improving participation in the ongoing capex and manufacturing cycle.
Investors should, therefore, avoid a binary approach across market-cap segments and instead focus on businesses with sustainable earnings growth, strong competitive advantages and reasonable valuations, while maintaining a diversified portfolio that can participate in opportunities across large, mid and small caps.
Overall, we remain focused on long-term structural growth opportunities backed by domestic economic drivers rather than short-term macro trends. Our preferred themes continue to include banks, consumer discretionary, manufacturing linked businesses, domestic capex, power and transmission & distribution, industrials, defense and electronic manufacturing services (EMS). “We favour companies that are well-positioned to benefit from India’s ongoing investment cycle, manufacturing expansion and formalization of the economy, while maintaining resilience against global macroeconomic and commodity-related volatility. We have been cautious on sectors such as consumer staples where margins remain vulnerable to input cost pressures or where the earnings outlook is still unclear,” the report said.
