Dear Investor,
In this write up we would try and address some of the popularly held beliefs and see if they actually help the investors or result in sub-optimal outcomes
• Interpreting Beta
• It continues to be time for alpha
• Fund flows
• Valuations and outlook
How Do Investors Interpret a Stock’s Beta?
Beta is a measure that reflects how strongly a stock’s price tends to move in relation to the broader market’s movements. It helps investors estimate how much a stock might amplify or dampen the market’s ups and downs when added to a portfolio
A Beta of 1.0 for a stock means it has been as volatile as the broader market. If the index moves up or down 1%, so too would the stock, on average. Betas larger than 1.0 indicate greater volatility. So if the beta were 1.5 and the index moved up or down 1%, the stock would have moved 1.5%, on average. Betas less than 1.0 indicate less volatility; if the stock had a beta of 0.5, it would have risen or fallen just half a percent as the index moved 1%.
When compared to index performance, a lower beta stock/ portfolio is expected to rise or fall slower than the index. If one is a long-term investor and is tuned to the fact that most global indices have risen over a period of time then having a high beta portfolio may improve the return outlook and vice-versa. The key to achieve good long-term outcomes is to not bring down the portfolio beta when the chips are down because then when the markets reverse, there could be a portfolio drag. Over time consistency in maintaining high beta should result in much better outcomes for the investors when absolute performance is measured at a time when the index is point to point higher and has been rising for some time. Higher earnings growth spaces should be expected to have higher beta. If one believes that markets follow earnings growth, then higher growth in earnings may imply that the stock/portfolio performs better than the market, might result in higher beta. A Nasdaq, with a higher representation of innovative tech companies with higher growth quotient, is more volatile than S&P500, but has historically delivered better return outcomes Calculating from the peak of Tech bubble i.e., Jan 2000 S&P 500 has delivered 4x (from 1454 in Jan 2000 to 5912 on May 29th 2025), while the Nasdaq which was more impacted by the tech bubble burst, has delivered 4.7X returns (from 4070 in Jan 2000 to 19176 on May 29th 2025). In this light it does seem that for a return focussed investor, higher Beta may result in better return outcomes.
The outcomes may improve further, if causes of higher volatility and beta are analysed – retaining the favourable one analysed and eliminating others. For example, higher Beta on higher earnings growth is often viewed positively, as our belief is that markets follow earning growth. However, higher beta on account of higher news flow association with a stock may not be viewed positively. Inconsistency of earnings can lead of higher beta and may not be again viewed positively. Leverage can accentuate earnings volatility and hence beta, and this may work in one period and not in another. We believe that investors should look at reasons for higher beta and choose the names where the reasons of higher beta are good, such as higher sustained longer period earnings growth, for favourable outcomes.
While beta can offer useful information when evaluating a stock, it does have some limitations. Beta can determine a security’s short-term risk and analyse volatility. However, beta is calculated using historical data points and is less meaningful for investors looking to predict a stock’s future movements for long-term investments. A stock’s volatility can change significantly over time, depending on a company’s growth stage and other factors. Also, low beta stocks can fall slowly over time and have bad absolute outcomes.
Beta gets higher focus in a period when the indices are not performing well and is associated with funds which experience a larger decline in such periods. This creates a perception that low beta is in some-ways perform better than high beta. However, Over the long term, as markets have historically moved upward, the reverse may also hold true in certain phases.
It continues to be time for alpha
Q4 result season is over. While the index earnings growth was better than expected, companies in our house themes has shown significant growth. Our belief is that market follows earnings growth. Month of May reflected relatively better performance of our investee companies compared to the index. We would continue to focus on spaces where earnings growth quotient would be maintained at a higher level. In this period of disruption and innovation when several new spaces such as new tech, electronics manufacturing, renewables, electric vehicles, AI (Artificial Intelligence), etc are emerging, we think chances of delivering alpha by growth focussed investors is favourable.
As we go into the new fiscal, quarterly results would have the support of low base of FY25 and this should enable companies and overall, the market to deliver a low double digit earnings growth vs a single digit growth seen in FY25. We expect our investee companies to deliver significantly better than index earnings growth.
Fund flow
While over last two years, FPIs have been marginal sellers, over the past 4 months, they have been net buyers. In such periods, markets have historically seen a bounce because domestics are secular buyers and the same has been observed from March. Brazil, the only emerging market to see inflows in the January – February period, continued to witness inflows. Domestic flows have been slowing down in the new year but we sense that the month of June has seen a revival.
In terms of FPI moves across sectors over the last one year, we find that relative weight in industrials, healthcare, materials, and IT has increased while it has declined in Financials, and consumer discretionary However, FPIs have become relatively smaller participants in the Indian equity market and domestic participants are now playing more prominent role. Over last two years FPI investments have been close to zero net, while domestic institutional investments have been over USD100bn.
Domestic funds continued to see inflows. However, pace of money flow reduced considerably in the month of May. However, SIPs hit an all-time high and provide continued participation and stability to the market. Overall, we are looking at SIP percentage of the AUM increase over time.
Valuations and outlook
Market has recovered significantly from recent lows. Many stocks in spaces such are defence and capital market have registered a new all-time high. A Sharp cut in interest rates by RBI has helped as has low crude prices. Strong Q4 results vs expectations improved sentiment. DXY Index lower than 100, weaker USD, etc are all positive for risk and growth assets.
At the current juncture though, some of these positive indicators have seen some worsening.
- Crude has shot up on Israel attack. We think the rise in crude prices would prove temporary as there is ample crude supply and OPEC had only recently increased production. Moreover, none of Iranian crude facilities have been impacted. After the spike to $78, it has fallen to USD73 levels. Iran is a country under sanctions and their crude exports are curtailed, which should make it possible to keep up the export volumes through other fields if one gets impacted. We are not worried about an impact on the Strait of Hormuz because it could potentially affect Iran’s relations with several Arab states.
- Supply of paper is getting stronger. Stake sales by promoters, QIPs and new IPOs are all gaining in momentum. This is absorbing lot of the liquidity with institutional investors. While a lot of the funds come back to the markets (for example stake sale by promoters is invested into some real assets but mostly back into financial assets), it takes time. While companies may not be needing cash, sales by promoters, private equity, etc. is impacting liquidity.
- Trump final tariffs would be rolled out over the next period: July 9th is the date before which the final tariffs would be rolled out. While US just imports about USD 80bn worth of goods from India with a value-add quotient of around USD20bn. This is a small part of our over USD4tr GDP and the impact of any tariff would be marginal on the negative side. On the positive side, if we are able to gain preferential access to the largest market globally, it can be very positive for the Make in India initiative of the government. Hence, our keenness in doing a deal with the US. US has tightened the Trusted Vendor definition and if it is approved by both their houses and becomes law, it would help Indian exports.
While, we think that the above factors may eventually be resolved on the neutral to positive side, there is a possibility that market may witness a period of consolidation in the market till the issues are resolved. High earning growth stocks where no fund raise is there, either by the company or by the promoters, could see relative strength while others should consolidate.
Given our view that the recent crude oil price spike may be temporary, and that the outcome of trade negotiations with the US would result in a positive outcome for India, we could see positivity build in the markets and it may improve as these uncertainties starts to subside. The current period of consolidation may offer investment opportunities for investors with a long-term perspective.
May the Good Times Continue.
Happy Investing
Source: Bloomberg, MOFSL, RBI, NSE Indices, MOAMC Internal
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