Dear Investor,
In this edition, we cover the following topics:
- Factors affecting the growth part of the market have become relatively more benign
- Q4 Result Season is around the corner
- Valuations
- Growth offers a great opportunity to invest
We have had a difficult period since the beginning of the calendar year. While indices had started to correct from Sep’24 onwards, the high growth part took a hit from January as currencies wobbled and leveraged investors cut positions. Yield-sensitive investors reacted to increase in yields by selling here and move to US markets. China’s relatively low valuations prompted investors to redirect their funds towards the region, especially as it experienced strong market performance coinciding with the Deepseek launch. If we look at FPI actions in the new year across emerging markets, we find that ex of Brazil, all major markets have seen strong selling. Also, if we see the selling intensity as a percentage of the market cap of a country, India falls somewhere in the middle. This points to same common factors working against all Emerging Markets rather than any country-specific factors and validates our view that bond yields and currency moves were the key reason for the sharp correction, followed by an uptick in Chinese equity which pulled money from all other EMs.
As we end March 25, some of these factors have become relatively more benign. US markets have become most pricey in the world. Chinese markets have had a large outperformance. Outflow of money to China and US may hence reduce. US 10 Year yields have declined to 4.3% from a recent peak of over 4.8% and once again should be attracting less money from else-where. USD index has fallen. INR has regained stability at around 87 to the USD which could again encourage leveraged players to take up positions over time. Trade deficit has reduced and a drop in oil prices help. Lower trade deficit points to sustainability of the currency level, encouraging market participants to resume normal activity. On the domestic front, the end of year related trades are expected to be getting closed, reducing the pressure further. We had covered some of these factors in our last edition and had expected foreign selling pressure to reduce, which it has. At the same time in the new fiscal, the retail/HNI selling pressure could also reduce.
While foreign selling pressure has reduced, on the domestic front, the flows into mutual funds have remained strong though have fallen in intensity vs the Oct to Dec period. Cash levels in mutual funds are high. Domestic macros are seen to be improving. GST collections are up, Power demand is sharply up, RBI has reduced interest rates, injected liquidity in the system and may do more cuts as we go forward on controlled inflationary pressures. These factors could aid investor sentiment.
Q4 result season is around the corner. Industry seems to be confident of delivering a strong Q4. Index of Industrial Production has been strong and that indicates strong Q4 for industrials. From now on, the earnings base may remain favourable for 4 quarters and this could further aid sentiment. Industrials have borne the brunt of the selling pressure and a strong Q4, could go a long way in addressing some of the concerns. We believe that spaces like EMS and renewables may deliver above expectation numbers. Outlook for a warm summer helps consumer durable companies. Global geopolitics may help outlook on defence. It seems that March has seen an increase in orders across multiple defense companies, potentially easing concerns about growth. Lower interest rates could helps outlook on NBFCs. Chemical companies could deliver strong YoY results. Consumer tech companies have reset expectations and we remain positive here. Capital market companies might deliver weaker results on lower equity volumes. Spaces like IT and banks, where we are less represented, had seen outlook improve two months back which we had noted, and the space had performed strongly relatively. However, outlook for IT clearly seems to be getting impacted on prospects of a US slowdown. Banks could also see Net Interest Margins squeeze as interest rates go down. With large heavy sectors in the index taking a breather, it may result in tailwinds for alpha.
Strong results could come in when stock prices have seen a sharp correction and most stocks are trading at levels seen over six months back. From these levels, a good Q2 had worked well for growth space which gives us hope that a good Q4 could do an encore.
This leaves US import taxation, the prime fear in the market. On this count, our belief is that India may see import levies similar to other nations. Import duties are a source of revenue for the US. They may seek to manufacture the strategically important stuff internally while continuing to source other stuff from abroad. In this scenario, the import duties are like GST that India imposes and does not impact market access of one player over the other. It seems that key target of the duties is China and in effect countries through whom it routes products. Our hope is that duties imposed on us may be favourable. Better market access to the US may result in net positive outcome for India even corrected for any economic slowdown seen there and may help Make in India initiatives.
However, India is a domestic focussed economy. We believe most of the names in our portfolio may benefit from India growth story. While our trade surplus with US looks large, the value addition in spaces like cell phone assembly, jewellery, petchem, etc is very low. An approx. USD40bn trade surplus is just around one pct of our GDP and if we look at value add (which is the correct measure), it is negligible. Europe has a larger integration with US and their markets are doing fine as they seek to indigenise and strengthen their armed forces. Hence, we believe that fears of what a US may do is less relevant. Our markets suffered on account of currency and interest rate movements and these are settling down. We believe that vs Free Trade Agreements with east which has similar cost structures as ours and were not favourable to us, the FTAs with the west, EU and the US, could be beneficial on complementary strengths. In any case the outcome of the tariff may be known by April. To sum up our thoughts on this topic, we do believe there may be higher import duties on all imports. However, with concessions that are being extended from our side, we could get favoured deal and that could be beneficial. In any case, representation of some of our largest exports to the US in the market (Textiles, Gems, etc), is very limited. Electronics exports, e.g. Apple phones, again have a low value add in India and the ecosystem is not in the listed domain.
Valuations have become favourable and below 10 year average levels. Economy is experiencing an uptick. Large cap, midcap, flexi-cap and small cap indices have all delivered returns below earnings growth returns in this fiscal, implying that over a period of a year, all have become relatively cheaper. An outlook of strong earnings growth over next 3 to 4 quarters assisted by low base, increases the odds of a favourable markets over the new fiscal. We take further strength from the fact that while Jan/Feb are relatively weak months in India, the rest of the year may make up for the weakness.
We have stress tested our portfolios for
- Export linkage to the US
- Spaces which may get impacted on larger access to US companies
- Cash on book and near term and long term growth visibility
On these above counts, we find only around 15% of any portfolio exposed. Here again outcomes can be beneficial as well. Spaces like EMS, renewables, capital markets, NBFCs and banks, Luxury consumption, defence, etc are all domestic focussed spaces and are not impacted by potentially higher imports from the US. Higher/ preferred access to the US market for Indian produce could be a significant positive. The thought of excess global produce being dumped into India is a risk. However, the ability of the government to protect Indian industry from such an event is high given the back drop of what the US is doing.
We believe that space which have seen a sharp correction on technical reasons rather than fundamental reasons could be the spaces to hunt for ideas.
Thank you
Happy investing
May the Good Times Continue 😊
Source: Bloomberg, MOFSL, RBI, NSE Indices, MOAMC Internal
Disclaimer:
This article has been issued based on internal data, publicly available information, and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The Stocks/Sectors mentioned herein are for explaining the concept and shall not be construed as investment advice to any party. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates, and data included in this article are as of date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses, and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken based on this article. The graphs used are to explain the concept and are for illustration purposes only and should not use for the development or implementation of an investment strategy. Past performance may or may not be sustained in the future. Investments in the securities market are subject to market risks, read all relevant documents carefully.
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