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Month: June 2023

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MONTHLY MARKET UPDATE & OUTLOOK – JUNE’23

Financial lesson from economy of Norway

As of today, Norway boasts one of the highest GDPs per capita in the world falling only behind Switzerland & a select group of micro nations. The country has

1.    A robust trade surplus;

2.    One of the highest national life expectancies;

3.    Extremely skilled workforce

4.    A very low unemployment rate;

5.    International recognition as aplace that is very easy to do business.

However, Norway wasn’t always this prosperous. In the 1960s it was an economy mainly based on fishing with a GDP similar in size to underdeveloped countries like Bangladesh or Nigeria.

But, in May of 1963, the Norwegian government asserted sovereign rights over natural resources in areas of the North Sea and they found a lot of oil. In the mid-70s, Norway produced more oil per capita than any other country in the world and even today it is only beaten out by the UAE & Saudi Arabia.

The oil boom caused Norway’s GDP to grow over five times in the 1970s, from $12B to $65B,but this newfound wealth was not being generated through private companies like Shell, Exxon or BP but rather a publicly run and owned company. 

This meant that the profits from oil sales made the Norwegian government very rich and if they wanted, they could have easily gone on a public spending spree, building fancy cities and public infrastructure or even reducing taxes but they didn’t and even today income and business taxes in Norway are still among some of the highest in the world.

Norwegian government had the foresight to realize that oil wealth was not forever and the citizens of Norway would not be satisfied if they had to go back to fishing in a generations time so the government invested the money into a sovereign wealth fund, Norway Government Pension Fund Global. This is the largest sovereign wealth fund in the world (with $1.3 trillion Assets undermanagement) beating out China’s State Investment Corporation which is remarkable considering that China has a population 270 times larger than Norway. 

This also means that every citizen of Norway essentially has around $250,000 (INR 2.12crore) invested into a giant hedge fund. However, only the profits generated from these investments are used to fund things like education, infrastructure, hospitals etc. Recently, the fund posted $84B quarterly profit.

Norway was a country that won the oil lottery in1970s. But, the citizens of the Norway did not get to enjoy the proceeds of the lottery and every penny went towards the corpus of the fund, which further was invested in assets across the globe. Some years down the line, the country may run out of the oil resources but the impact will not be much.

As an investor, our goal in life should be similar to that of Norwegian government. In the early healthy years of our working life, we should invest aggressively, into businesses, stocks and real estate so that, in the later years, these assets provide us with a steady source of income. Many may not know but

·       78% of athletes go broke within 2 years of retirement

·       70% of lottery ticket winners go bankrupt in less than 5 years

·       60% of NBA athletes go broke within 5 years of retirement

~ It doesn’t matter how much you make. What matters is how much you keep & what you do with it~

Quote of the month

In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices risk, but it is an opportunity.

– Li Lu, founder, Himalaya Capital 

  • From the global leaders:

“To me, India is the real future,” Mark Mobius, the cofounder of Mobius Capital Partners

Indian macro dataflow remained strong:

  • Manufacturing PMI: Manufacturing PMI dropped to 57.8 in June 2023 from May’s 31-month peak of 58.7 but remained in expansion zone (>50 points) for the 24th straight month;

  • Services PMI: The Indian services PMI declined to 58.5 after reaching a 13 year high in April 2023. It remained in expansion zone (>50 points) for the 23rf straight month;

  • GST Collection: India’s gross GST revenue collection in June stood at Rs. 1,61,497 crore, registering a 12 per cent YoY rise;

  • Credit growth: Scheduled commercial banks (SCBs) reported a robust credit growth of 15.4% in FY23 compared to 9.7% in FY22. With this, India witnessed the sharpest rise in borrowings in the last eleven years;

  • Inflation: Retail inflation likely to be flat at 4.26% in June;

  • Forex: India’s foreign exchange reserves dropped by $2.901 billion to $593.198 billion.

Equities:

  • Indian equities ended the month with strong gains and NIFTY / S&P BSE Sensex closing near all-time highs. NIFTY 50 / S&P BSE Sensex ended the month ~3.5% higher.

  • Mid-cap and small-cap indices outperformed large-cap indices and were up 19.0% and 20.5%, respectively;

  • The rally was primarily driven by continued buying by FPIs, upbeat US economic data, resilient domestic economic activity, receding inflationary pressures and subdued crude oil prices.

  • Sector-wise, all sectors ended positive;

  • FPIs bought equities worth USD 6.7 billion (May 2023: USD 5.0 billion) in June 2023 and have cumulatively bought equities worth USD 13.6 billion in Q1FY24;

  • Mutual Funds SIPs touched Rs. 14,700 cr. for the first time reflecting the strong belief of Indian investors in equities. 

Fixed income:

  • MPC minutes released for its June 2023 meeting were on a hawkish side with most members cautioning against complacency towards inflation in view of the resilience in growth and emphasised bringing down the headline CPI to its target of 4% and not just within the tolerance band (2%-6%);

  • Gsec yields trended higher during the month and 10Y Gsec yield ended the month at 7.12%, up 13 bps on month on month basis;

  • Average interbank liquidity surplus increased in June 2023 driven by fall in currency in circulation on back of deposit of INR 2000 banknotes and forex purchases by RBI.

  • Outlook:

  • Global growth trend remained mixed with economic activity supported by steady improvement in services sector and tight labour markets across most major economies. While US activity remains better than expected, Eurozone, UK and China data surprised on the downside. Elevated interest rate and modest demand outlook for goods is likely to keep housing and manufacturing activity muted. Overall, global growth is expected to slow down driven by tighter financial conditions and losing consumption momentum.

  • As on June 30, 2023, NIFTY 50 was trading at ~18x FY25E price to earnings multiple. The valuation multiples have moderated from their recent peak but is at elevated levels vis-à-vis historical average

  • We remain positive on equities over the medium-to-long-term considering the resilient domestic growth outlook, robust corporate profitability and growth supportive policies. However, Accelerated monetary policy tightening, a sharp slowdown in global growth, persistent inflation, a slowdown in earnings growth and a delay in recovery in the rural sector are key near-term risks. 

We mentioned in our April’23 monthly outlook that growth/quality will outperform value in the next few months. The same is evident from the chart below and the outperformance is likely to continue for the next few months.  
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Investing in the US markets

In the last twelve years, US technology index – NASDAQ 100 has delivered 544% – almost double of Sensex (220%). Even better, if one would have invested from India, the investor would have earned a return of approx. 1,000% just because of dollar appreciation from INR 45 per dollar to INR 83 per dollar. Hence, international exposure to US stocks can not be avoided in the portfolio.

Here are the key benefits of investing in US markets (NASDAQ 100) from India:

1. Access to 100 of the largest non financial companies:

Following 10 companies by market capitalization have a weightage of 50% in NASDAQ 100:

2. Hedge against INR depreciation:

As evident from the chart below, an investor earned around 5X returns over Sensex in the last 12 years just by investing in ETFs of NASDAQ 100 from India.

3. Global exposure:

NASDAQ-100 Index comprises of companies with overseas business &  generates the bulk of their revenue from different countries.

It comprises of large multinational companies with focus on disruption.

4. High-growth & innovative large cap companies

 

NASDAQ-100 companies on an average spend 3.5x more than S&P 500 index companies for R&D. 62 companies in NASDAQ 100 in near past have filed patents across 34 key areas of disruptive technology.

5. Exposure to “new economy” sectors

NASDAQ 100 is market capitalization weighted index comprised of 100 most innovative and rapidly expanding non-financial Companies. US economy growth is shifting from capital intensive, traditional industries to the new economic sectors such as healthcare, technology and consumer. Last 10 years sales growth across industry in US large and Midcaps can be seen in Real Estate, healthcare and technology.

6. Sector and geographical diversification

However, there are certain points one should consider before investing in the US markets:

 

  1. Volatility: US markets are more volatile than Indian markets;

  2. Taxes: W.e.f. 01/04/2023, Indian government will tax foreign funds, foreign ETFs and foreign stocks at per the slab rate of investors (without the lower tax of 10% as applicable for Indian equities);

  3. Currency exchange rates can be unfavorable at times;

  4. Higher interest rates may affect the growth of companies listed in US which may be evident in lower stock returns.

  5. Since these companies generate most of their revenues across the world, a recession may affect the stock returns  in near term.

 

However, for the long run, we remain bullish on companies listed on NASDAQ 100. An investor with aggressive risk appetite or suitable investment objective (foreign children education or world tour etc.) may consider investing in the US markets. For more information, kindly connect with your respective relationship manager.

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Sleeping Elephant Is Rising

As per Maddison (2020) estimates, India’s share in the global GDP was 24% in 1700. By 1820, this number fell to 16% and by the time of independence, the number had fallen to 5%. In 250 odd years, India went from contributing a quarter of global GDP to less than 5%.

 

As India completed 75 years of independence, we witnessed much change. The Indian economy now stands as among the largest and fastest growing in the world, truly breaking free from the shackles of colonialism. The changes are not just been effected at a micro level. The big picture has not been lost in this quest as well:

  • The Insolvency & Bankruptcy Code, 2016: Not only was starting a business in India a mammoth task, but shutting one down was perhaps an even bigger one. The introduction of IBC brought the much needed clarity in the bankruptcy law.

     

  • Goods and Service Tax, 2017: considered as the most landmark reform of independent India. Prior to GST, a litany of indirect taxes exited – each requiring separate registration and filing norms. Indirect taxes varied across states and hampered interstate movement of goods. GST revenues have been above the Rs.1.4 lac crore for 12th continuous month.

     

  • Real Estate Regulatory Authority (RERA): not only protected the rights of homebuyers but also promoted the development of private enterprise by maintaining their solvency and creditworthiness.

     

  • Direct taxes: Year 2017 saw a lowered personal income tax rate, and in 2019, corporate taxes were reduced to 22% to counter underreporting of income and the black economy. The introduction of taxpayers charter, efforts to reduce litigation and use of technology have moved the system away from one of enforcement to facilitation.

     

  • Ease of doing business: When Modi government took over, India was ranked 142 in the rankings published by the World Bank. Close to 1500 old legislations were identified and scrapped. In 2020, India’s rank improved to 64 – a 79 position improvement in just 5 years.

     

  • Foreign Direct Investment: Foreign Investment Promotion Board (‘FIPB’) was abolished in 2017. Several sectors that required approval prior to investment were moved to the automatic route. For rest, individual ministries became approval authorities. India received the highest-ever FDI inflows of $ 84.8 bn in FY 22.

  • The process of registration of patents and trademarks was completely revamped and a large number of additional examiners were recruited. Compared to 2015-16, number of patents filed increased from 12,000 to 28,000 and the number of trademarks increased from 65,000 to 2.5 lacs in 2020-21.

     

  • Production Linked Incentives (PLI) schemes were introduced to boost size and scale in manufacturing. Focus shifted from providing support towards target linked output rather than input. Total production from PLI schemes is estimated to be $500 billion over the next few years. PLI schemes have potential to generate approx. 60L jobs in next few years.

     

  • Definition of MSME was revised. Micro enterprise defininition raised investment threshold to Rs. 1 crore (from Rs. 25 lacs) and adds turnover of less than Rs. 5 crore as an additional criteria. Investment threshold of Small & medium firms have been doubled.

     

  • Four labour codes – Code on Wages, 2020; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health & Working Conditions Code, 2020 – subsumed 29 central labour laws.

  • Infrastructure:

     

  • India has spent $14 trillion on infrastructure in the 75 years since independence. 50% of that (or $7 trillion) was spent in the last 9 years.

  • The pace of building National Highways increased from 12KM per day in 2014-15 to 37 KM per day in 2020-21.

  • Sector specific programmes such as Bharatmala (highways), sagarmala (ports), UDAN (air travel) were announced.

     

  • Close to 55% bank accounts opened in the world during 2015-18 were opened in India leveraging the simplified KYC norms.

     

  • National Payments Corporation of India – Unified Payments Interface (UPI) processed 6.8 billion transactions amounting to Rs. 51 billion in 2022.

     

  • 112 backward districts are being transformed under Aspirational Districts Programme (ADP).

     

  • In 2016, Startup India was launched. A bundle of laws were eased and income tax exemption was granted. Since then, 65,000 startups have been recognized. India’s startup ecosystem is third largest in the world.

India’s growth story will be led by the private sector, with the government playing the role of enabler and a facilitator.

 

A growth rate of 6% during 2022-47 will see Indian economy reach $16,4 trillion by 2047, a growth rate of 8% in this period will see economy reach a size of $20.6 trillion and a 10% will take economy to $32.6 trillion.

 

Source: Made in India by Amitabh Kant

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Financial Lessons From Shrimad Bhagwat Geeta

Bhagavad Gita is the divine discourse spoken by the Supreme Lord Krishna himself and is the most popular and well known of all the sacred scriptures.

 

Mahatma Gandhi once said “When doubts haunt me, when disappointments stare me in the face, and I see not one ray of hope on the horizon, I turn to Bhagavad Gita and find a verse to comfort me; and I immediately begin to smile in the midst of overwhelming sorrow. Those who meditate on the Gita will derive fresh joy and new meanings from it every day.”

 

It is an unquestionable fact that schools and colleges gives us knowledge but Bhagavad Gita gives us wisdom and even the greatest people on this planet seek wisdom in tough situations.

 

Hence, in the subsequent paragraphs, we have shared key principles from Bhagavad Gita that may benefit you in the investment journey:

    1. Control your emotions: The Bhagavad Gita teaches us that it is important to control our emotions, including fear, greed, and anger, when making investment decisions. Emotional decisions can lead to irrational choices that may negatively impact our portfolio.

       

    2. Focus on long-term goals: The Gita emphasizes the importance of focusing on the long-term, rather than short-term gains. Similarly, when investing, it is important to have a long-term investment horizon and focus on achieving your financial goals.

       

    3. Practice detachment: The Bhagavad Gita teaches us to practice detachment from the outcome of our actions. In investing, this means we should not become too attached to any particular stock or investment, and be prepared to sell it if necessary.

       

    4. Embrace uncertainty: The Gita teaches us that the only thing that is certain is uncertainty. Similarly, in investing, it is important to acknowledge that there will always be risks and uncertainties associated with investing.

       

    5. Be patient: The Bhagavad Gita emphasizes the importance of patience and perseverance. Similarly, when investing, it is important to be patient and avoid making impulsive decisions based on short-term fluctuations in the market.

       

    6. Focus on the process: The Gita teaches us to focus on the process rather than the outcome. In investing, this means focusing on a sound investment strategy and sticking to it, rather than trying to chase after quick gains.

       

    7. Seek knowledge: The Bhagavad Gita emphasizes the importance of seeking knowledge and wisdom. Similarly, in investing, it is important to educate ourselves and seek out information and insights that can help us make better investment decisions.

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MONTHLY MARKET UPDATE & OUTLOOK – MAY’23

India transformed in less than a decade; different from 2013: Morgan Stanley

This India is different from what it was in 2013. In a short span of 10 years, India has gained positions in the world order with significant positive consequences for the macro and market outlook, Morgan Stanley said in a report.

 

Ten big changes, mostly because of India’s policy choices, and their implications for its economy and market were highlighted in the report:

 

  1. Supply-side Policy Reforms: Infrastructure has picked up & corporate tax at par with peer countries;

  2. Formalisation of the economy: GST collection on an upward trend & digital transactions as % of GDP at record high;

  3. Real Estate (Regulation and Development) Act;

  4. Digitalizing Social Transfers;

  5. Insolvency and Bankruptcy Code;

  6. Flexible Inflation Targeting;

  7. Focus on FDI;

  8. India’s 401(k) Moment: SIP, NPS and EPF investment in equities at record high;

  9. Government Support for Corporate Profits;

  10. MNC Sentiment at Multiyear High: India’s service export market share accelerates.

The ten macroeconomic and stock market implications of the aforesaid changes:

  1. Manufacturing and capex as % of GDP to increase steadily: the share of both to rise in GDP by approximately 5ppt by 2032;

  2. Export market share to double: Export market share will rise to 4.5% by 2031, nearly 2x from 2021 levels;

  3. Major shift in consumption basket: As India’s per capita income increases from US$2,200 currently to about US$5,200 by F2032, this will have major implications for change in the consumption basket, with an impetus to discretionary consumption;

  4. Lower volatility in inflation and shallower interest rate cycles: Shallower rate cycles could also imply more benign equity market cycles;

  5. Benign trend in current account deficit

  6. A profit boom: The share of profits in GDP has doubled from all-time lows hit in 2020 and are set to rise further – maybe even double from here – leading to strong absolute and relative earnings. This explains India’s apparently rich headline equity valuations.

  7. Lower correlation with oil prices: Lower share of foreign portfolio (FPI) in current account funding has reduced the stock market’s negative return correlation with oil prices, especially when oil prices rise due to supply disruption.

  8. Lower correlation with US recession: As India’s reliance on global capital market flows has reduced, the market’s sensitivity to a US recession and US Fed rate changes also seems to be fading.

  9. Valuation re-rating: This reflects persistent domestic demand for stocks and higher growth for longer. India is trading at a premium to long-term history, albeit well off highs and in line with recent history.

  10. India’s beta to EM has fallen to 0.6: This is a consequence of improved macro stability and reduction in dependence on global capital market flows to fund the CAD.

Credits: Brian Feroldi

Quote of the month

You cannot sow something today and reap tomorrow! A seed has to go through the various seasons before it turns into a fully grown tree. So is the case with investing

 

-Parag Parikh

From the global leaders:

 

Indian macro dataflow remained strong:

 

  • Manufacturing PMI: Manufacturing PMI at 31-month high of 58.7 in May on robust demand for new orders and remained in expansion zone (>50 points) for the 23rd straight month;

  • Services PMI: The Indian services PMI declined to 61.2 in May after reaching a 13 year high of 62 in April 2023. It remained in expansion zone (>50 points) for the 22nd straight month;

  • GST Collection: Gross GST collection for May 2023 stood at Rs. 1.57 lakh crore as against Rs. 1.41 lakh crore for May 2022, registering a growth of 12%;

  • Credit growth: Credit growth reached 15.42% YoY as of 19th May 2023 against YoY growth of 11.14% as observed on 20th May 2022;

  • Inflation: India’s retail inflation eases to more than 2-year low of 4.25% in May;

  • Forex: India’s foreign exchange reserves stood at $595.1 billion as of June 2.

Equity:

 

  • SENSEX grew by 2.5% in May.

  • BSE Mid-cap and small-cap indices outperformed large-cap indices and were up 6.3% and 5.6%, respectively

  • Sector-wise, all but two sectors ended in green, namely metals (-2.9%) and oil & gas (-1.6%). Auto (+7.9%), Realty (+7.7%) and IT (+6.7%) indices were the largest gainers.

  • Among the top gainers globally were Japan (+7.0%), Taiwan (+6.4%) and Brazil (+3.9%). Meanwhile, Hong Kong (-8.3%), the UK (-5.4%) and France (-5.2%) were the most affected;

  • FIIs (Foreign Institutional Investors) continued to be net buyers of Indian equities in May (+Rs. 38,093 crore);

  • Mutual fund SIP flows hit new high of Rs. 14,749 crore in May.

Fixed income:

 

  • The US Federal Reserve in its May-23 policy meet, raised the Fed Funds Rate by 25 basis points to 5%-5.25%;

  • The European Central Bank raised its key interest rates by 25 basis points during its May meeting;

  • The Bank of England raised the bank rate by 25 basis points to 4.5% at its May policy meet;

  • 10 year G-Sec rallied to sub 7% as as the US yields dropped sharply post FOMC meet wherein Fed signalled a likely end to the rate hiking cycle. 10-year

    benchmark traded in a range of 6.95%-7.13% during the month;

  • System liquidity remained in surplus with average monthly liquidity coming down to Rs. 72,594 crores surplus vs a surplus of Rs. 1,53,205 crores in the month of April.

Outlook:

 

  • Post March-2023, equity valuations have moved higher due to renewed interest from FIIs. India’s strong macro-economic situation has led to positive overall sentiments.

  • We are in a neutral situation where equities cannot be avoided due to strong macros, nor it is recommended to be overweight on equities, due to valuations.

  • The Union Budget’s focus on higher Capital Expenditure by the Centre & States; push for consumption through lower taxes and goal of fiscal consolidation, together underpin India’s growth.

  • Companies have started deploying the excess profit, as evidenced by the increase in ordering activity – a precursor to increase in private Capex. We should see an investment driven economic growth starting FY24E.

  • We expect that strong demand scenario (domestic and international businesses), softening raw material inflation, easing global supply chains, eventual pick up in rural income as rural economy responds to increasing government infrastructure spends and benefits from improved crop prices and sharp surge in consumption spending due to wedding season should help achieve broad based domestic growth in coming quarters. Hence, we are overweight on domestic demand related sectors as growth and earnings certainties may be higher in related segments

Disclaimer: The views expressed herein constitute only the opinions/ facts and do not constitute any guidelines or recommendations on any course of action to be followed by the reader. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers

 

Onesta Capital Ventures is a Multi Family Office based out of Gurugram (India). We aim to provide tailored independent wealth management and other family governance solutions to individuals and corporates.

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