Dear Investor
In this piece let us discuss the following:
- Market may be bottoming out
- It continues to be time for alpha
- High active weights in our portfolios
- Sectoral thoughts
- Conclusion
Coming period may present a good outlook for the market with flows overall expected to improve along with sentiment and supply of paper reducing. Let us consider the following:
- Gold prices are now stagnating and flows into that asset class may diminish.
- Gold price rise in the past period has been relentless and has induced a lot of passive flows into the metal. More recently, even silver joined the trend. However, Gold and Silver are now undergoing a phase of consolidation, close to the top. This category got Rs15kcr of flows in October. Most investors are still making a lot of money and the wealth effect may sustain, which is positive. Consolidation in Gold may be beneficial for regular active equity as it would be able to target a larger pie of flows.
- Supply of paper in the primary market has peaked out for the time being, leaving more for the secondary market
- Till October, the intensity of fund raise from the Indian market was very strong. It absorbed liquidity in MFs at the beginning of the year and is forcing a sale of held portfolio stocks to subscribe to the new offers. This put some pressure on the secondary markets. However, the money raised from primary markets may have reached a near term peak. It may be a few months before the October peak is crossed. This leaves more money potentially for the secondary markets.
- The experience in most large issues where retail interest was high, has been positive. IPOs are often the path that investors take to come to the market. We do expect to see an increase in number of investors with demat account in Oct. Most of these investors have had a good start to their investing journey and could deepen their commitment to the equity asset class. This helps broaden and deepen the equity cult in the country.
- Net Domestic flows have also diminished in Oct, but may pick up as more intense fund demand in festive season is now behind. India had a strong festive season real economy demand and this could be a reason to see large redemptions experienced by the industry in the month of October.
- FPI sales is lower on better relative valuations and stable INR. In the global context, Indian market have been laggards for last one year. This has resulted in a sharp correction in relative valuations. Logically, with lower yields in the US, Fed having cut rates and again expanding balance sheet, and improved relative valuations, the overall construct suggests a potential reduction in FPI sales. We continue to expect negative sales though, because of unfavorable outlook, on many BRIC countries in the developed world. The EM fund bucket should hence be seen as a leaking bucket with money moving from one market to the other being the pattern.
Sentiment, the other big factor, may improve as focus on culmination of the India-US trade developments progresses. Most markets have performed well after trade agreements with the US and India could follow a similar path. In any-case, with profit expansion over last year, an income tax cut in the last budget, GST cuts recently RBI cutting repo rates and more cuts expected over the next period, there is a significant spring energy in the price. Low inflation, low crude prices and good Q3 outlook are supportive for sentiment. Rate cuts may lower the threshold of investors to move to equity. This phenomenon was seen during Covid-19 when the demat expansion gained momentum when repo-rate dropped to 4%. With expectations of further rate cut over the next few months, repo rate could move lower, a level, which could support increased interest into equity.
- Weak Jan- Mar 15 period should be kept in mind. This year, we had a large cut. We had shared that this phenomenon has happened 11 out of 16 years with 9 out of those years seeing a reversal over rest of the year. This year appears to have followed a similar trend happened. The next year, could be gentler as INR may stabilize after a sharp depreciation, quarter 3 result is expected to benefit from GST cuts and good monsoons and budget could be friendlier towards investors given the current conditions. The period could also see potential benefits from culmination of the trade deal.
It continues to be time for alpha
The 2QFY26 corporate earnings concluded on a healthy note, with overall earnings growth driven by OMCs, Telecom, Metals, Technology, NBFCs – Lending, Cement, and Capital Goods. Conversely, Oil & Gas (ex-OMCs), Automobiles (led by Tata Motors), and Banks (Private and PSU) dragged overall profitability. The Nifty delivered a 2% YoY PAT growth. Nifty reported a single-digit earnings growth for the sixth consecutive quarter since the pandemic (Jun’20). Large caps delivered 10% growth, mid-caps performed relatively better delivering around 34% growth while growth in small cap was narrow. This quarter saw no of companies delivering higher than expected earnings growth exceed number of companies that did not. This season has again witnessed a sharp deviation in performance of the new emergent spaces vs the spaces reflected in the index. The table below showcases the same.
We believe that markets generally follow earnings growth adjusted for valuations. With this thought we aim to include sustained high growth spaces of our markets in our portfolios building a construct focused on high growth potential.
Over the past few years, it has been seen that the market share of the top 10 names in the index has declined, reflecting increasing market recognition of evolving realities.
Our constructs are high on active ratios
At MO, we practice focused high conviction investing and construct portfolios which have a high active ratio. This approach aims to identify opportunities in spaces with potential for sustained earnings growth, as we believe that markets generally follow earnings adjusted for valuations.
The present period shows several spaces, evident in quarterly results, which are offering the combo of relatively high growth with the potential to sustain it over time. These spaces find prominence in our constructs compared to traditional spaces, which are more represented in the indices and typically show comparatively lower earnings growth.
Sectoral thoughts
Banks saw relatively positive performance in October. While many banks delivered a NIM decline, as past rate cuts were transmitted, some reported flat to better NIMs also. There is a thought that NIMs have bottomed out. This resulted in improved sentiment towards banks. The sentiment was also supported by PSU consolidation reports, and higher FPI limits for PSUs which could potentially increase passive flows.
While technical factors continue to play out, lower inflation may create conditions for regulated rate cuts over the next few months. Banks have achieved the NIM sustenance by reducing savings bank rate, in many cases notably. Some large banks have savings rate at around 2.5%, a sharp cut from historical levels of 4%. This lever may be drying out. Further RBI rate cuts, could have a deeper impact on NIMs. We have some exposure to midcap banks where growth potential is high and select PSU banks which could benefit from any index moves.
IT the other large sector also did well in the last period, while earnings growth was sub 10%. The stock price moves for most names in IT have generally reflected profit movements.
Our funds are focused on high growth in earnings spaces. Our outperformance vs indices over the last one year has been modest. This points to substantial valuation correction for the high earnings growth part of the market, while the earnings growth potential may continue to sustain.
Conclusion
With sentiment improving and with policy environment increasingly becoming pro-equity, and demand/ supply of paper also incrementally favoring the secondary markets, we think there is potential for improved market performance in the next period. With high growth spaces continuing to deliver good growth, we think there is potential for alpha, especially with strong valuation correction on relative basis over the past one year. Lower inflation, better liquidity in India and global, lower interest rates, all are supportive factors for growth investing and could help our cause.
Our portfolios remain highly domestic focused, are low on leverage and are less exposed to spaces like commodities, staples, oil, coal, cement, large IT and large banks on account of lower growth outlook in these spaces or higher volatility in earnings.
Thank You
Happy investing
May the Good Times Continue 😊
Source: MCX India, Bloomberg, MOFSL, RBI, NSE Indices, ICICI Securities, Kotak Institutional Equities, 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. These statements are based on current market conditions, which may change, and past performance is not indicative of future results. 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. The views expressed above are those of the MD and CEO of the AMC and are based on current market conditions and informational purposes only and should not be construed as investment advice. The term ‘alpha’ is used in the context of broader market opportunities for differentiated performance through stock selection. It does not indicate or guarantee outperformance by any specific mutual fund scheme. 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. This material does not compare or promote any specific investment product or strategy over others. References to investor flows or macroeconomic factors are for informational purposes only and should not be construed as market predictions or investment recommendations. Past performance may or may not be sustained in the future. Readers shall be fully responsible/liable for any decision taken based on this article. Investments in the securities market are subject to market risks, read all relevant documents carefully.
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