Dear Investor
Q1 result season ended. It ended on expected lines. We have been observing a lack luster performance of the legacy businesses, more present in the index, while newer spaces show significantly stronger performance. This trend has sustained for several result seasons and we believe the same could continue over the foreseeable future.
Our belief is that market ultimately follows earnings growth adjusted for valuations and since today, there are several spaces that are delivering growth in earnings of an order higher than the index. As we have said before, we see this as a time for Alpha.
If one looks at our portfolios, one would find that our constructs doesn’t have legacy businesses. Spaces like large banks, large IT, staples, commodities, fossil fuel based businesses, ICE vehicles, etc are minimally represented in our house. Since these spaces are strongly represented in the Index and but have low representation in our constructs, our tracking error is very high and we expect it to continue.
High sustained earnings growth is available in spaces like electronic manufacturing, New Tech which includes consumer and Fin Tech companies, Renewables, Defense, Manufacturing, Hospitals, in Pharma narrow spaces such as GLP1 drugs, Capital market participants, Luxury consumption which includes travel and Tourism, Jewelry, Hotels, etc. These are spaces which are well represented in our house across our funds. Our focus on companies with high EPS growth means that the beta of our funds may be higher, indicating potentially greater volatility in line with market trends. However, this beta reflects exposure to earnings growth, which is a key driver of market returns. We seek to limit beta arising from factors such as commodity dependence, excess leverage, and structurally challenged businesses. Investors should not expect to find commodities or excessively leveraged businesses in our fund constructs. We aim to maximize growth-oriented beta consistent with our investment approach
The India US trade deal is again getting focus. There have been visits to iron out the differences. The CEA has made a comment setting the expectations of the deal to be between 10-15% range. This seems reasonable, given the size of our market, exports from US and growth delta between our two economies. If the deal does happen in this range, it could be a long term positive for the economy and may provide access to one of the world’s largest market to our exporters at one of the lowest rates globally. This could prove to be a supporting factor to the Make in India initiative of GOI, particularly in the labor intensive areas. Though most equity market relevant areas such as electronics, pharma, etc are not impacted by the tariffs, a deal could help remove the sentiment overhang.
Sentiment is important in the market. While buys and sells in the market are matched, it is sentiment that determines where the settlement finally happens between buyers and sellers. Performance of most global markets improved substantially after the deal was struck with the US.
Over the past year, markets (indices) have been flat. This has happened while earnings have grown 8%, there has been a RBI rate cut of 1% and GoI has rationalized GST rates, effectively reducing them down for most categories. GST rate cut could potentially save consumers over a Lac Crs, resulting in a potential demand increase in the future. While heavy rains and demand deferment on GST cuts may impact Q2 numbers, we believe there is a good chance the markets could respond positively to a favorable deal with the US, if it occurs.
FPIs have been selling consistently in the past period. However, US bond yields have declined to closer to 4% now and INR is now been around 88 to a USD for some time. Lower US bond yields and stable currency could again encourage arbitrage seeking FPIs and hedge funds to resume normal market activity. Also, since, India has been amongst the worst performing markets of last year, our relative valuations with other emerging and developed markets has improved and if sentiment improves, it could encourage emerging market FPI to also take a more positive view of India. There is a good chance that we see FPI selling may reduce in the next period.
Domestic flows continue to remain strong and positive. However, our sense is that the flows are below potential. We believe, the momentum of flows we saw in Sep’24 to Jan’25 period indicates potential. Lower domestic flows, almost in line with SIP flows, suggest subdued sentiment. As sentiment improves, we expect domestic flows to improve.
Supply of paper is the third part of the puzzle on flows. While we expect FPI outflow to reduce and domestic flows to improve, the supply of paper is torrential. When this happens, typically markets are range bound. This could happen this time around as well as investors sell old holdings to make space for new holdings. However, our belief is that sentiments decide the direction of market more than flows. Since we believe, sentiment is improving, chance of the market to realize a part of the spring over the next period of 3 months is high.
At Motilal Oswal Asset Management Company, we run focused high conviction, high earnings growth portfolios and believe that the lower interest rate, improved liquidity and better sentiment are tailwinds to our investment approach.
Thank You
Happy investing
May the Good Times Continue 😊
Source: 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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