Dear Investor,
The month of March saw a rebound from the correction seen in January and February. Equity markets rebounded as did currency markets. First half of April again saw a correction as the impact of duties levied by the US on the world was significantly higher than what was expected. While impact on India was relatively lower, markets were weak and gave away a portion of the gains from March. However, once the tariffs were deferred by 90 days, ex of base 10% and remained and expanded on China, markets regained strength and rebounded. Large cap indices recovered their losses for the year, supported by financial sector which were helped by better systemic liquidity and regulatory interest rate cuts. News flow in the market from global happenings is expected to continue and hence a higher degree of volatility in the next period should be expected.
However, on the positive side, the net effect of the events till date is not negative for the Indian economy. What we may have lost to potentially slower global growth on higher tariffs, we have more than gained on lower oil prices. Additionally, it is now clear that the US wants to claw back manufacturing back from China and is taking steps to do so. This process could present meaningful opportunities for Indian manufacturers especially in low value added and labor-intensive areas. It is also clear that the two largest economies are well entangled and could take years to disengage and in the interim a period of reconciliation and normalcy could be expected, to give industry time to untangle and create new supply chains. On the economy front, (1) CPI inflation remained under control at 3.3% in March versus 3.6% in February, and (2) Goods trade deficit widened to US$22 bn in March from US$14 bn in February. Foreign Portfolio Investors (FPIs) turned buyers on a few days’ vs being consistent sellers and that aided to the sentiment. Forex reserves improved and INR appreciated vs. USD.
Result season has started. In this season, aggregates are expected to remain weak as spaces like Banks, Tech services, Metals, Oil & Refining and Autos deliver low growth. Other spaces including Capital Goods, EMS, renewables, Luxury, Chemical, New tech, Defence, and Pharma are expected to lead profit growth. In the next fiscal, while the smaller growth spaces is expected to remain strong, larger sectors like Oil & Refining, Metals and Banks could deliver better growth. We are focused on smaller niches where growth is expected to sustain over the medium term. Amongst the smaller sectors, we believe, that the Capital Market players may also see strong growth in addition to the spaces outlined above.
Interestingly, while the initial few results from some IT companies have been below expectations, the market reaction has been measured. Similarly, one of the Capital Market company saw poor results but again the market reaction was measured. In the past few months, such results would have had a significantly larger impact. This suggests that, following the recent market corrections, valuations appear to be more sustainable.
Policy direction is clearly moving in the direction of making more in the country all over the world. De-globalization appears to be gaining strength. In India, Make in India is getting a fillip. Recently discussion paper was floated to increase the domestic content in wind mills and a PLI on Semiconductors was brought out. Steps taken by the US against China could potentially provide market access to Indian players. With global trade conflicts, it seems world is warming up to the potential of Indian market and newspapers have reported softening of trade stance by both the EU and China towards India. This may prove supportive for low-cost manufacturing in India. According to reports, Foxconn is exploring a large facility in UP and this could be the sign of times.
Valuations are supportive with many growth-oriented spaces having corrected over the past period. We listed out such segments earlier. We are growth focused investors and believe that over long term, earnings growth has the potential to contribute positively to investor outcomes. Our portfolios aim to maintain reasonable representation in sectors with higher growth potential. This growth-oriented approach naturally results in lower exposure to sectors with relatively muted growth prospects (as shared earlier). In this period of high volatility, it helps that most of the high growth spaces identified by us are focused on the domestic market. Also, most of the businesses (ex -financials) are net cash on book which again helps in periods like this when equity fund raise may be more difficult.
As the result trends have been showing for a few quarters now and are expected to continue some established businesses, including several in the indices, have seen moderated earnings growth compared to their past trends. At the same time, newer businesses have been contributing more to overall growth. Our portfolios have a high representation of new businesses with a belief that over time, relatively higher growth (valuations adjusted) may translate into better outcomes for our investors.
While this result season is expected to be low growth on aggregates, in the new fiscal, the low growth of this year could prove to be a good base and we expect earnings growth to be reflective of nominal economic growth. This should improve sentiment.
India has been a neutral country in this era of trade wars. For global money, there are lesser investment avenues. China and US may want to dis-entangle their financial markets also from each other. EU always has an eye on potential risks and is very process driven. The same may drive it to also dis-entangle itself from the US and China focus. India has the potential to be the next largest real and capital market and may find increasing acceptance as an investment destination. We have a lot to look forward to.
Import duties have been only paused by the US for 90 days, post which we may expect another round of volatility. However, there remains a possibility that India and the US may arrive at a favourable trade understanding during this period
Many of the indicators such as DXY which is below 100 for the first time in a year, weakening USD with INR strengthening to Jan levels, low crude prices at around USD65/bbl are all supportive of emerging market growth asset class like equities. While US bond yields have spiked, it is mostly on account of unwinding of basis trade, and it remains lower than recent peaks. While uncertainty remains high and risk appetite low, we think a gradual normalization of these factors may contribute to improved market conditions. With investors disengaging from the largest global markets, India could benefit strongly even if a small percentage of the money comes to us. We do expect to see many more EM funds ex China getting launched with India at the core.
Thank you
Happy Investing
May the Good Times Continue
Source: Bloomberg, MOFSL, RBI, NSE Indices, MOAMC Internal
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