Dear Investor
In this piece let us discuss the following:
- Gold price increase
- Flows: Reduced FPI selling pressure and IPOs
- Jan to Mar 15 is a weak period: If sentiment improves, it can reduce the impact
- Valuation and conclusion
Gold price increase
Over the past two years, gold prices have been up relentlessly. Indians have had a long association with Gold. According to recent estimates, that Indian households now own close to 30,000 tonnes of gold whose value is close to USD4tr, very close to the current GDP size.
As a percentage of equity holdings, the value of gold held is currently near historical highs. A similar peak was seen during the COVID-19 pandemic in 2020. In this period while equity markets had fallen sharply, Gold had continued to rise. The impact on wealth effect in a period of high economic uncertainty is likely much lower vs the present when there is no such comparable economic uncertainty.
Gold is a very well owned asset class in India. Its ownership is wider than equity or real estate. Hence, the wealth effect of a rise in value of Gold may be felt. However, most Indians do not recycle Gold. The gold loans have grown sharply, but is only 1.7% of the value of Gold. While we do not expect Gold holdings to be pared down to fund current consumption, yet, the value uptick could potentially improve consumer confidence.
Our portfolio include exposure to segments such as jewelers, jewelry manufacturers and lenders against gold to benefit from the above factors.
FPI selling pressure appears to have reduced. Net domestic flows have reduced. Supply of paper may be peaking out
FPI have sold strongly in Jul, Aug and Sep, a first three consecutive months of selling over past 3 years. However, on lower bond yields which dipped below 4%, relatively stable currency and much improved relative valuations vs China, we had expected FPI selling pressure to reduce. We have seen this in October. This may continue.
Gross Domestic flows have increased in Sep, but Net flows have reduced vs the previous month. October is a month of big festivals and investor attention may remain diverted and we again expect to see similar or lower net inflows in October vs September are expected unless sentiment improves due to events such as a trade deal or general market buoyancy.
Month of October saw several large IPOs. Now that these large IPOs are behind, the overall money raised from primary markets may have reached a near-term peak. At the same time, IPOs often get new investors to the market. If a large IPO results in investor gains, it can have a positive rub off on investing sentiment. We would track new investor addition to the equity culture and flows into mutual funds. October, though, may see a lower net inflow in MFs on festivities.
Given lower FPI sales, domestic flows maintained and paper supply peaking out, the next period could be better for the market as more flows are directed towards the secondary market.
January to Mar 15 have been a weak period for the market 11 out of last 16 years
This happens as investors await policy moves in the budget and on end of year considerations. Last year was a particularly bad period as it also coincided with INR weakness which further prompted FPI selling. This can be mitigated if positive sentiment coincides in this period. Positive sentiment may arise from the following sources:
- Drop in US interest rates: This has two effects. 1) Weakening of the USD vs others which increases the propensity of money flowing out of the US. This would also mean a more stable INR. This helps increase hedge fund activity. 2) Lower interest rates induce yield seekers to hunt for risk free/ less risky yields around the globe. Indian stock markets may offer arbitrage. US fed has indicated a possible rate cut. An uptick in FPI interest as explained above may help address the depth of weakness that one sees in Jan to Mar 15.
- Drop in Indian interest rates: Inflation is down in India. With a cut in GST, the outlook on inflation has further improved. This opens up the possibility of an RBI rate cut soon and the same has been indicated by RBI itself. We anticipate up to 2 rate cuts till end of this fiscal. If this happens, the repo rate would be at 5%, a low, ex of Covid period. This may spur retail interest back into the stock market
- This period would coincide with 3rd quarter numbers. While Q2 has been impacted by higher than usual monsoons and deferment of demand on account of GST rate cuts, we expect Q3 to be strong given the strength seen in the festival season. Better numbers from corporate India could improve sentiment
- A US India trade deal: This is expected to be concluded, one way or the other, before Christmas holidays. Given the size of our markets and growth, we think we may have some leverage and expectation is that our outcome would be sub 15% with only a few areas opened up for the US or maybe we won’t have a deal. If we have a deal, it could support Make in India by offering better access to the US market for our businesses vs others.
Conclusion
Overall, at this juncture, there is a lot in the price. Markets have been flat for a year while earnings have improved. At the same time, global markets have been very buoyant and this has addressed the valuation concerns also. With improved sentiment and a possible reduction in interest rates, the upcoming period could be relatively favorable for Indian markets. We think it continues to be time for Alpha for the markets. While Q2 result season is continuing, companies in newer spaces such as solar, cables, smaller IT companies, NBFCs, etc have also delivered positive numbers. Banks and IT have also surprised positively. Overall good numbers may help sentiment towards market but better earnings growth delivery by newer businesses could be a source for alpha.
Thank You
Happy investing
May the Good Times Continue 😊
Source: Bloomberg, MOFSL, RBI, NSE Indices, ICICI Securities, Kotak Institutional Equities, MOAMC Internal
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