Quarterly Update – October 2023

Tread with Caution!

As always, the last three months has been action packed with rapid equity market movements in India, Interest rate tightening in the US and Europe, geopolitical uncertainty in Europe and Asia as well as weak economic data from China, Europe, and the US. All this may be too much to take in at one time! Let us look at these aspects one by one. India Equity Market Returns – Mid/Small caps on Fire! The quarter ending September 2023 was a quiet one for the large caps but the real action took place in the mid and small cap indices. The story has been the same over the last one year.

(Source: Nifty Indices)

• Mid and Small caps have outperformed large caps by 10% in the last three months and by more than 15% over the last one year
• We have seen a brisk rally in the overall markets since March 2023 fueled by strong FII and DII fund flows. The FII flows have turned negative in the last one month
• The monthly SIP book has swelled to 16,000 Crore Rs last month. A lot of money has chased mid and small caps in the last six months. In the past we have seen that these flows are driven by recent returns. We will have to wait and see if history repeats itself
• In several mid/small caps a lot of “story telling” is evident. Several stocks are being driven up based on future orders being converted to cash flows over the next five years. Again, the experience over the last three decades has not been good for such “story telling”

Global Economic and Geopolitical situation – Highly volatile

• Globally we are seeing High interest rates in the western world due to persistent inflation. The 30-year Mortgage rate in the US has moved to 7.57% which is the highest in the last 23 years! Average credit card interest rates in the US are at 21% (highest since 1994). High interest rates coupled with an alarming increase in the US government debt is indeed a cause of concern for the US economy
• Chinese economy failing to show traction after the re-opening. While the growth rate may be above 5%, this is well below past growth rates. As the world’s largest commodity importer, this will impact the global economy in many ways. Drop in the Chinese demand has already impacted Western European countries like Germany
• Geopolitical events including the Russia – Ukraine conflict as well as the Hamas-Israel war need to be tracked closely. The recent middle east geo political situation has caught investors unaware. Beyond the financial implications (e.g., oil price increase) if the situation worsens, this could have a huge social impact

Each one of the above events can have an impact on the stock markets and we remain cautious on account of all these things.

India Economic Events

• We are the only major economy with an expected GDP growth of above 6%. Income Tax and GST collections continue to be positive
• The inclusion of Indian Government Bonds by JP Morgan in the EM Bond Index is expected to bring foreign exchange inflows upwards of 30 billion dollars over the next 1-2 years. On the Equity side, Jefferies and CLSA have upgraded the Indian equity weights in their portfolio
• The Indian Government is making huge investments through capital spending (roads, railways, and other infrastructure). In addition, the Make in India initiatives with a focus on import substitution (e.g., Defense) will help the Manufacturing sector. Investments in technology including the ONDC initiative will increase digital adoption in

Way Ahead
As indicated above, this is the time to be cautious. This is not a time to cut fixed income and go overboard on equities. Some good multi asset funds which invest across equities, gold and fixed income will help in portfolio rebalancing. Specific thematic funds which look to capture the India opportunity outside large caps as well as specific sectors with long term tail winds (e.g., ealth care) will help investors capture upcoming themes.

As always, we will reach out to you individually, if we see an opportunity in your portfolio to add these above-mentioned themes.
Happy Investing!