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Author: Mayank Mehta

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The World Does Not End, and Equities Never Die

In a world filled with uncertainties and rapid changes, one thing remains constant: the persistence of human ingenuity and innovation. The adage “the world does not end, and equities never die” serves as a reminder of our ability to adapt, evolve, and find new opportunities even in the face of adversity.

A Resilient World

“The world does not end” is a statement that reflects the undeniable fact that no matter how dire circumstances may seem, humanity has a remarkable capacity to endure and persevere. Throughout history, we have faced numerous challenges, from wars and economic crises to natural disasters and pandemics. Yet, each time, we have emerged from these trials stronger and more resilient than before.

The global economy, for instance, has weathered its fair share of crises, from the Great Depression of the 1930s to the financial turmoil of 2008. In each case, the world did not come to an end. Instead, it adapted and rebuilt, demonstrating the remarkable resilience of human society.

“Equities never die” refers to the enduring value of assets and investments, especially in the context of financial markets. It emphasizes that, despite market fluctuations and temporary setbacks, long-term investments have historically shown an ability to recover and grow over time.

This concept is particularly relevant in the world of stocks. While stock markets can experience volatility and sharp declines, history has consistently demonstrated their capacity to rebound and reach new heights. This is a reflection of the underlying strength of the Indian economy and the potential for equities to provide substantial returns over extended periods.


Every crisis in the past has been followed by a recovery and further upside.  Sensex (1980-till date):A

India outperformed despite following crises, events and volatility:

 

Episodes of Domestic Political Uncertainty

  • 8 coalition governments

  • 3 different governments between 1996 and 1998

  • A government that lasted only 13 days in 1996

  • Prime Ministers that many have not heard of: H.D. Deve Gowda; I.K. Gujral

  • 17% fall in market in a day due to surprise change of govt in 2004

 

Other India Specific Events from 1998 to 2015

  • US sanctions after India’s nuclear tests, May 1998

  • Limited war with Pakistan in Kargil in 1999

  • Serious stock market scandal in 2001

  • Terrorist attack on Indian parliament in2001

  • 26/11 terrorist attacks in Mumbai

  • Corruption cases & arrest of billionaires/ministers /senior bureaucrats in 2011/12

  • Back-to-back drought years in 2014 and 2015

 

Global Market Crashes and Crises since 1997

  • Asian Crisis in 1997

  • Russian crisis in 1998 (India has had historically strong trading ties with Russia)

  • Bursting of technology bubble in 2000

  • 9/11

  • Global Financial Crisis in 2008

  • Tech sell off, end of QE and rising inflation(since 2022)

 

Recent Key Events Since 2016

  • Demonetization (2016)

  • NBFC Crises (2018/2019)

  • COVID (2020-2022)

  • Lockdowns (2020-2022)

  • Rate hikes globally

There is always a reason not to buy Equities. Yet despite several intermittent crises, Indian Equities have gone up over the long run mirroring earnings growth:

Despite challenges and uncertainties, the Indian stock market continues to evolve and grow. Investors who approach the market with a long-term perspective, diversification, and a thorough understanding of the regulatory landscape can find opportunities amidst the volatility.

 

India’s resilience in the face of crises has been stark, and the clean-up and reforms alongside various crises have set the stage for India to outperform over the coming decades.

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Global Banking Giants Are Betting Big on India’s Growth Story

India has been structurally outperforming other markets by a significant margin in the past (even in USD terms) 

Prominent global investment banks have recently upgraded India’s status to “overweight” in their portfolios, underlining the nation’s robust economic fundamentals and alluring valuations. This development holds significant promise for both the Indian economy and its capital markets, reflecting the confidence of investment experts in India’s potential for growth in the forthcoming years.

Key statements from investment bankers in recent times include:

  • In October 2023, JP Morgan raised India’s status to “overweight,” citing the nation’s strong GDP growth, appealing risk-adjusted returns, and favorable historical seasonality preceding general elections.

  • CLSA increased India’s portfolio allocation from “40%underweight” to “20% overweight” in October 2023, emphasizing India’s solid economic fundamentals and attractive valuations.

  • Japan’s Nomura adjusted India’s weight from neutral to overweight in October 2023,highlighting India’s robust economic fundamentals and appealing valuation in comparison to other emerging markets.

  • Morgan Stanley upgraded India to “standout overweight, “driven by improvements in relative economic and earnings growth and a macro-stability setup well-suited to navigate a higher real rate environment.

  • The global head of equity strategy at Jefferies elevated India’s weight in the Asia ex-Japan relative portfolio, as detailed in the Greed & Fear note.

  • Goldman Sachs expressed optimism about India’s medium-term growth prospects, recommending foreign investors to increase their exposure to the emerging market due to its stable macroeconomics and strong historical track record.

Among other leading global investment firms, EQT AB from Sweden, Barings in the United States, and BlackRock have all increased their investments in India. Several sovereign wealth funds, including the Public Investment Fund of Saudi Arabia, Abu Dhabi’s Mubadala Investment Co., and Qatar Investment Authority, have also expanded their investments in India.

This year our clients have inquired about investment opportunities in India at a rate we haven’t seen in over a decade. We view this renewed interest in the country as justified and likely to persist.

-Solita Marcelli, Chief Investment Officer, UBS Global Wealth

Implications of these “overweight” ratings are substantial in the long term:

  • Increased Investment: A positive stance from reputable banks can attract more foreign and domestic investors to the Indian stock market. This increased investment can drive up demand for Indian stocks, potentially leading to higher stock prices.

  • Improved Market Sentiment: Favorable outlooks from leading banks can boost investor confidence, leading to higher trading volumes and increased market activity.

  • Access to Capital: Companies listed on the stock exchange may find it easier to raise capital as investors are more willing to buy their shares.

  • Lower Cost of Capital: A positive outlook can result in a lower cost of capital for Indian companies, making it more affordable for them to borrow funds or issue new shares.

  • Sectoral Focus: Investment banks may highlight specific sectors or industries within India that they believe will outperform, leading to increased investment in those areas.

  • Boost in IPO Activity: More companies may choose to go public through initial public offerings (IPOs when they see a favorable investment climate, leading to increased IPO activity on the stock exchange.

  • Market Liquidity: Higher investor participation can increase market liquidity, making it easier for investors to buy and sell stocks.

  • Economic Confidence: A positive outlook from investment banks can boost overall economic confidence and consumer spending, positively impacting the earnings of listed companies.

  • Longer-Term Investments: Investors may consider longer-term investments in Indian stocks based on the favorable outlook, which can lead to a more stable and less speculative market.

  • Market Capitalization Growth: With more investors entering the market, the total market capitalization of the stock exchange can grow, reflecting the overall size and strength of the market.

  • Currency Appreciation: Increased foreign investment can lead to the appreciation of the Indian Rupee, which can further attract foreign investors and provide stability for investors.

  • Research and Analysis: Investment banks with an overweight stance often provide in-depth research and analysis, which can help investors make informed decisions and navigate the Indian stock market effectively.

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The Hard Decision Warren Buffett Made 30 Years Ago

In the ever-evolving world of finance and investing, one name stands out for its enduring success and wisdom: Warren Buffett. What truly distinguishes him is not solely his remarkable wealth but also the pivotal decisions he has made throughout his illustrious career.

 

One such decision, which has become a remarkable case study in the world of finance, took place in the early 1990s when Warren Buffett faced a critical choice: to invest in stocks or bonds.

 

During that period, a 30-year government bond offered an attractive interest rate of 6.15%, while the dividends from his shortlisted companies, Coca-Cola and American Express, stood at 5.7% and 3.15%,respectively. For many conservative investors, the allure of the higher bond interest rate might have been compelling. However, Warren Buffett, known for his long-term vision and deep understanding of investing dynamics, chose to invest in stocks.

 

Fast forward to today, and the results of that decision are nothing short of remarkable. The bond still holds its original value ($1.3 billion), while the investments in Coca-Cola and American Express have appreciated exponentially. A$1.3 billion investment in Coca-Cola is now valued at $25 billion, and the same $1.3 billion in American Express has grown to $22 billion. Moreover, the dividends generated from these investments today stand at $704 million for Coca-Cola and $302 million for American Express, far surpassing the interest Buffett would have earned today ($80 million) on his bond investment had he made that choice 30 years ago.

In Buffett’s own words, “If you had to choose between buying long-term bonds or equities, I would choose equities in a minute.”

 

This compelling story serves as a testament to the power of long-term investment strategies and the foresight of a true financial genius. It reminds us of the potential rewards that come with investing in stocks when viewed from a perspective that extends beyond the short term.

 

Please feel free to reach out if you have any questions or thoughts on this topic or any other financial matters.

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MONTHLY MARKET UPDATE & OUTLOOK – SEPTEMBER’23

India’s bond moment

Indian government bonds have successfully secured a coveted position in JP Morgan’s Emerging Markets bond indices. This accomplishment is a significant milestone for the Indian financial market and holds substantial implications for global investors and the broader economic landscape.

 

JP Morgan, a renowned financial services institution with diverse interests encompassing commercial banking, asset management, and index research and development, curates a suite of bond indices that are tailored to various countries and regions. These indices serve a pivotal role in international finance, akin to the role played by benchmark indices like NIFTY 50 or SENSEX in the equities domain, but with a focus on the fixed-income market.

 

The primary function of these bond indices lies in facilitating international investors’ access to a diverse array of bond offerings from different countries. Until recently, India had not featured within any of JP Morgan’s bond indices. However, this landscape is set to undergo a transformative shift, as India is poised to become an integral component of JP Morgan’s prestigious Emerging Market bond indices.

 

Commencing from June 28, 2024, India will be accorded a 1% weight within the index. This allocation is planned to incrementally increase by 1% each month, culminating in a cap of 10% by March31, 2025. The implications of this development are profound, as it portends a substantial influx of foreign investments into Indian government bonds.

 

Estimations suggest that the inclusion of Indian government bonds in JP Morgan’s indices has the potential to attract a considerable sum. Edelweiss Mutual Fund has reported that JP Morgan’s global bond indices presently account for a substantial US$ 213 billion worth of investments by global investors. It is reasonable to anticipate that a 10%weight allocation could translate to approximately US$ 21 billion.

 

Furthermore, Goldman Sachs has projected an influx of more than $40 billion over the next 18 months. The implications of this development can be viewed through three distinct lenses:

 

1. Deepening of the Bond Market: This development is highly favorable for individuals and institutions with fixed-income portfolios. Foreign investments in Indian bonds have been relatively modest, totaling around $3 billion in 2023. Consequently, an anticipated influx of approximately $40 billion over the next 18 months represents a substantial shift. Additionally, the inclusion of India in JP Morgan’s indices may prompt other leading index providers, such as Bloomberg and FTSE, to follow suit, further expanding the scope of foreign investment in the Indian bond market. It is noteworthy that the Indian government has been actively striving to deepen the country’s bond markets over recent years, evidenced by initiatives such as the launch of Bharat Bond ETFs for retail investors and the establishment of the RBI Retail Direct portal. The magnitude of foreign investments anticipated in the wake of this development can be instrumental in further maturing the Indian bond market.

 

2. Positive Spillover into Equity Markets: The positive implications extend beyond the fixed-income space. Banks in India are prominent investors in government bonds. The expected inflows resulting from the inclusion of Indian government bonds in JP Morgan’s indices can potentially drive up prices of Government Securities (G-Secs). This, in turn, stands to benefit banking institutions over the long term.

 

3. Support for the Rupee: Currency dynamics are also influenced by foreign investments. Inflows of dollars into India tend to strengthen the Indian rupee, while outflows have the opposite effect. With foreign investors poised to invest significantly in Indian government bonds, a corresponding inflow of dollars is anticipated. This has the potential to provide crucial support to the Indian currency, which carries implications for broader economic stability.

 

In conclusion, the inclusion of Indian government bonds in JP Morgan’s Emerging Markets bond indices represents a watershed moment in the international financial landscape. It not only signifies a remarkable step in the globalization of India’s financial markets but also holds the promise of substantial economic benefits, from the deepening of the bond market to positive spillover effects in the equity space and the reinforcement of the Indian rupee.

Financially rich vs. a rich life:

Quote of the month

Doing well with money has a little to do with how smart you are and a lot to do with how you behave.

 

The proper financial mindset is to be scared enough to save for the short run and brave enough to invest for the long run.

 

– Morgan Housel, Partner, Collaborative Fund

From the global leaders:

The Indian macro dataflow has continued to exhibit resilience and strength across various key indicators:

 

  • Manufacturing PMI: In September 2023, the Manufacturing Purchasing Managers’ Index (PMI) registered a value of 57.5. It remained within the expansion zone (>50) for the 27th consecutive month.

  • Services PMI: India’s services sector strengthened further in September, witnessing strongest output in 13 years. India’s services PMI stood at 61 in September, up from 60.1 in August. The reading was above the 50-mark separating growth from contraction for a 26th consecutive month.

  • GST Collection: September 2023 witnessed GST collections amounting to Rs. 1.62 trillion, reflecting an 10% year-on-year increase. This achievement marked the nineteenth consecutive month of collections surpassing the Rs. 1.4 trillion threshold.

  • Inflation: On the domestic economy front, the August CPI decreased to 6.83% from 7.44% in July 2023. In August, WPI inflation continued to remain in deflation, although its pace slowed, as it declined to -0.5% compared with -1.4% in July.

  • Foreign Exchange Reserves: India’s forex reserves drop for 4th week, fall to over 5-month low of $586.91 billion.

  • Trade Deficit: India being net importer of oil, high crude prices resulted in rupee depreciation & higher trade deficit. The trade deficit in August was $24.16 billion, almost 17% wider than July’s $20.67 billion gap.

Equity Market Overview:

  • In September, the tug of war between the bulls and the bears intensified after Nifty breached the 20,000 mark on 11th September.

  • The Nifty and the Sensex rose 2% and 1.5% respectively in the month.

  • Midcap outperformed the largecap indices registering 3.7% gains, while smallcap underperformed the largecap indices registering 1.1% gains

  • FIIs had been net buyers since March 2023 but turned major sellers in September with net selling of Rs. 14,768 cr (USD 1.77 Bn).

  • On the sectoral indices front, Power (+7.1%), Metal (+6.4%), Capital Goods (+5.6%), Oil & Gas (+3.1%), Auto (+3.1%), Realty (+3.1%) outperformed the indices while, Consumables (+1.8%), IT (+1.7%), Bankex (+1.6%), FMCG (+1.2%) underperformed the key indices during the month.

  • Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 16,402 crore for the first time. This highlights the strong confidence Indian investors have in equities.

Fixed Income Landscape:

  • Indian bonds were relatively resilient as well, as the announcement of India’s inclusion in JP Morgan GBI-EM bond index helped offset the pressure from rising global yields.

  • Indian 10-year yields still moved higher by 5 bps for the month to end at 7.22% versus 7.16% a month ago.

  • Systematic liquidity continued to be in the deficit in line with reserve banks of India’s objective to ensure tighter front end of the curve. After a brief period of positive liquidity at the beginning of the month the deficit rose to a high of Rs. 1.5TN. The relief on account of I-CRR was negated by tax outflows.

Market Outlook:

  • Concerns have arisen regarding the ‘Goldilocks‘ narrative of the Indian economy due to the convergence of weak global indicators and a softening of domestic macroeconomic factors. In the context of economics, ‘Goldilocks‘ signifies a state in which a nation experiences a period of both ‘High Growth’ and ‘Low Inflation.’

  • Over the long term, it is plausible that India’s ‘Goldilocks’ story will remain resilient. However, in the immediate future, this may not be the case, primarily due to persistently high inflation and a potential softening of economic growth. Several factors contribute to this near-term uncertainty, including the rural-urban growth disparity, the impact of deficient rainfall on inflation and demand, the global economic slowdown affecting exports, and the influence of rising crude oil prices on external sector risks. Consequently, the near-term outlook for the ‘Goldilocks’ scenario appears uncertain.

  • Nevertheless, there are compelling reasons for optimism over the long term. These include a robust capital expenditure (capex) momentum, sustainable government revenues, healthy corporate profitability, a growing emphasis on indigenization, favorable demographic trends, and resilient bank balance sheets. As a result, the long-term economic perspective for India remains bright and clear.

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The Jewish Wealth Legacy: How Jewish Families Educate Kids About Money

The Jewish community has earned a reputation for its remarkable prowess in money management and wealth creation. A testament to this is the presence of five Jewish individuals among the top 10 wealthiest Americans, including notable figures like Mark Zuckerberg of Facebook, Larry Ellison of Oracle, Larry Page of Google, Sergey Brin of Fellow, and Michael Bloomberg.

Remarkably, while Jews constitute just 3% of the American population, they account for a staggering 67% of Forbes 400 richest Americans.

In the quest for financial acumen, I have delved into numerous books expounding on the art of prudent money management and debt resolution. However, it is the straightforward yet immensely practical approach employed by the Jewish community that has seized my attention and kindled my imagination. This approach centers on the financial education provided to Jewish children from an early age.

 

Within Jewish culture, the process of teaching children about money commences almost as soon as they are able to articulate words. This practice is deeply rooted in an understanding of the biblical adage, “Teach a child the way of the Lord, and when they will grow, they will not depart from it.” Consequently, the transmission of financial knowledge to the younger generation is an integral facet of Jewish heritage. Children, characterized by their receptive nature and eagerness to learn, serve as ideal recipients of these teachings.

To cultivate wise money management skills in their offspring, Jewish parents employ a practical tool: five labeled jars, akin to contemporary piggybanks or home banks. Each jar is designated for a specific financial purpose and features an accessible top for ease of use. These jars bear the labels TITHE, GIVING & OFFERING, SAVING, INVESTING, and SPENDING. Whenever a child receives an allotment of 10 Shekels, the currency of Israel, they are provided with the following instructions for allocation:

–One Shekel shall be apportioned to the TITHE jar (equivalent to10% of the allotment). This practice, deeply rooted in Jewish philosophy,instills in the child the virtue of generosity by prioritizing contributions tocharitable causes.

–Another Shekel shall be earmarked for the GIVING & OFFERING jar(also constituting 10% of the allotment). This principle reinforces the notionthat one should prioritize the needs of others before tending to their own,emphasizing a sense of social responsibility.

–One Shekel shall be reserved for the SAVINGS jar (equivalent to 10% ofthe allotment). This allocation is intended to serve as a financial cushion forunforeseen emergencies, teaching the child the importance of fiscal planning toaddress unexpected financial challenges that may require immediate attention.

–Two Shekels shall be dedicated to the INVESTING jar (20% of theallotment). This allocation encourages the child to develop an earlyunderstanding of investment and the potential for wealth accumulation overtime.

–The remaining five Shekels shall be designated for the SPENDING jar (50%of the allotment). This allocation allows the child to manage discretionaryexpenses for their personal use.

The rules governing access to these funds vary: the GIVING jar may only be opened on Sundays, the TITHE jar is unsealed at month-end, the SAVINGS jar is reserved for special occasions or emergencies, and the INVESTING jar is unlocked when it reaches full capacity. Crucially, the child exercises complete autonomy in determining when and where to invest the accrued funds, with parents refraining from intervention, even in the face of potential missteps. The Jewish tradition holds that failure serves as an invaluable teacher, fostering creativity in decision-making and nurturing a sense of responsibility for one’s choices.

Research attests to the formidable challenges posed by financial management in our lives. Successfully navigating this terrain can significantly ease the management of other life aspects.

Consequently, Jewish children, armed with a strong sense of responsibility and financial acumen, often experience heightened satisfaction and success compared to their peers. In stark contrast to the credit card debt woes experienced by many Americans and Europeans, the dispersed Jewish community thrives in both personal finances and business endeavors.

For those of us who did not have the privilege of undergoing these transformative lessons in our early years, there are valuable lessons to be gleaned. First and foremost, making a concerted effort to impart financial wisdom to our own children is among the most worthwhile investments we can make in their future. Additionally, adopting a receptive attitude and embracing these principles, regardless of age, can yield significant benefits. While it may seem unconventional, embarking on this financial journey, perhaps alongside your children, can prove rewarding.

In summary, the financial teachings passed down within the Jewish community serve as a compelling model for instilling responsible and informed money management from an early age. By embracing these principles and passing them on to future generations, individuals and families can empower themselves to achieve financial stability and success.

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MONTHLY MARKET UPDATE & OUTLOOK – AUGUST’23

Uday Kotak: The King retires, leaving a legacy to reverberate through Kotak Mahindra Bank

Some key financial facts:

  • Kotak Mahindra Finance Ltd. (now Kotak Mahindra Bank Ltd.) went public in 1992. On the day of listing the share was listed at Rs. 1,300 to 1,400 against the issue price of Rs. 45 per share (Single day gain of 2,800%).

  • An investment of Rs. 10,000 with Kotak in 1985 would be worth around Rs. 300 crore today – implying an IRR of 39% excluding dividends.

  • Uday Kotak is the Asia’s richest banker with a net worth of $14.8 billion. He owns 26% of the bank.

  • During the Dot Com bubble burst in 2002-03, Kotak’s shares experienced a significant decline of 89%, plummeting to Rs. 1.44. Similarly, during the Global Financial Crisis in 2008-09, the share price saw a substantial drop of 78%, reaching Rs. 60. However, despite these tumultuous periods, Kotak Mahindra Bank has delivered substantial wealth for its shareholders.

  • Today, the share price stands at a robust Rs. 1824, reaffirming our investment philosophy: the value of investing in high-quality businesses with strong and prudent management.

Uday Kotak has relinquished his position as Managing Director and Chief Executive Officer of Kotak Mahindra Bank, an institution he founded in 1985, and currently ranks as India’s third-largest private financial entity in terms of market capitalization.

The remarkable accomplishment underscores the exceptional achievement realized by Mr. Kotak. Rarely in the global financial landscape has such an expansive conglomerate within the financial services sector emerged within a single generation. Originating as a modest bill-discounting enterprise, it has metamorphosed into India’s third-largest private bank in under four decades, chiefly due to the vision and relentless dedication of its creator. Uday Kotak, who affixed his own name to the institution, tirelessly worked to cultivate trust and credibility.

While the brand ‘Kotak Mahindra’ will continue to bear his surname, Mr. Kotak has chosen to transition to a more subdued role within the organization. It is fitting and deserving that Uday Kotak receives due recognition and appreciation for his extraordinary contributions.

Wealth Creation Chart:

Quote of the month

Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow.

The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.

– George S. Clason, The Richest Man in Babylon

From the global leaders:

The Indian macro dataflow has continued to exhibit resilience and strength across various key indicators:

 

  • Manufacturing PMI: In August 2023, the Manufacturing Purchasing Managers’ Index (PMI) registered a value of 58.6. It remained within the expansion zone (>50) for the 26th consecutive month. This sustained expansion was underpinned by new orders’ growth, which reached its highest level since November 2022.

  • Services PMI: The Indian Services PMI cooled down to 60.1 after achieving a 13-year high level of 62.3. This robust performance was buoyed by strong demand, both domestically and in the export sector.

  • GST Collection: August 2023 witnessed GST collections amounting to Rs. 1.59 trillion, reflecting an 10.8% year-on-year increase. This achievement marked the eighteenth consecutive month of collections surpassing the Rs. 1.4 trillion threshold.

  • Credit Growth: Credit growth reached 19.72% YoY as of 11th August 2023 against YoY growth of 14.11% as observed on 12th August 2022.

  • Inflation: July’s CPI inflation rate breached RBI’s comfort zone and reached 7.44% in July 2023, from 4.81% in June 2023, at a 15-month high. WPI inflation remained in negative territory, with the July 2023 print at -1.36%, 276 bps down from June 2023’s at -4.12%, as higher prices for food and commodities played into a higher base. This was the fourth straight month of deflation witnessed.

  • Foreign Exchange Reserves: India’s forex reserves jump $4.03 billion to $598.89 billion for the week ended September 1, 2023.

  • Trade Deficit: July 2023 Trade deficit stood at US$21 bn (second highest in current financial year) driven up by slowing export momentum & resilient domestic demand.

     

Collectively, these indicators portray a dynamic economic landscape, characterized by both accomplishments and challenges, as India navigates through evolving global dynamics and domestic circumstances.

Equity Market Overview:

  • The BSE Sensex fell by 2.5% in August.

  • BSE Mid-cap and small-cap indices outperformed the Sensex and were up +2.6% and +6.1%, respectively.

  • Net FII flows, continued to be positive for August, albeit at a lower quantum (+$1.2 Bn, following +$4.2 Bn in July). DIIs turned into marginal net buyers of Indian equities.

  • Sector-wise, Oil & Gas, FMCG and PSU indices saw the greatest declines, falling 5%, 4% and 2.7% respectively m/m. Top gaining indices were Consumer Durables and IT, which were up 4.2% and 4.1% respectively.

  • Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 15,814 crore for the first time. This highlights the strong confidence Indian investors have in equities.

 

Fixed Income Landscape:

  • G-sec yield were elevated during the month on higher-than-expected domestic monthly inflation print and higher US rates. That said, the second half of month saw rates cooling off a bit on tomato prices coming down and easing US rates on softer flash PMI print and employment data.

  • In Jackson hole symposium, US Federal Reserve Chair Jerome Powell emphasized the potential necessity to implement additional interest rate hikes in order to effectively manage inflation.

 

Market Outlook:

  • Higher interest rates have exerted pressure on the global economic outlook. While inflationary pressures appear to have peaked on a global scale, Central Banks remain watchful of the persistently elevated inflation rates. It is anticipated that interest rates will remain elevated for an extended period, contingent upon data-driven policy actions.

  • Despite prevailing global uncertainties, domestic macroeconomic trends have demonstrated resilience. Encouraging signs of recovery are discernible in industry capital expenditure, potentially bolstered by initiatives such as the Production Linked Incentive (PLI) and localization efforts, including the China+1 strategy. Furthermore, there are early indications of a rebound in rural demand.

  • India’s external economic situation benefits from robust services exports and reduced imports. Key indicators such as tax collections as a percentage of GDP, credit as a percentage of GDP, and notably, the increasing corporate earnings as a percentage of GDP reflect the effectiveness of transparency and formalization reforms implemented prior to the pandemic.

  • Valuations in the near term continue to present challenges. In the current market environment, the careful selection of stocks and rigorous risk management are paramount. We maintain our emphasis on sectors linked to domestic demand, as these segments may offer higher levels of growth and earnings certainty.

  • We firmly believe that India’s medium to long-term prospects remain robust, driven by investment cycles and policy reforms. Consequently, we recommend that investors adopt a long-term perspective when considering equity investments, taking into account their investment objectives and risk tolerance. Investors may opt for a phased approach to navigate the short-term uncertainties, while those with a more conservative stance might consider asset allocation strategies.

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India’s Remarkable Journey from ‘Fragile Five’ to World’s Most Sought-After Investment Destination

India, a land rich in history, culture, and diversity, has undergone a transformative economic journey over the past few decades. From being labeled as one of the “Fragile Five” emerging economies with vulnerabilities in 2013, India has emerged as one of the world’s most sought-after investment destinations in just a matter of 10 years. This remarkable transformation is a testament to the country’s resilience, policy reforms, and commitment to growth.

The Fragile Five and Economic Challenges:

In the aftermath of the 2008 global financial crisis, India, along with Brazil, Indonesia, Turkey, and South Africa, was branded as part of the “Fragile Five.” These countries exhibited economic vulnerabilities such as high inflation rates, fiscal deficits, current account deficits, and weak currencies. India faced challenges like inflationary pressures due to rising food and fuel prices, a large fiscal deficit, and a persistent current account deficit.

2013: Morgan Stanley coined India as a part of ‘Fragile Five’

2023: Morgan Stanley upgraded India to No. 1 slot in its emerging market portfolio

Structural Reforms and Policy Initiatives:

Recognizing the need for comprehensive reforms, India embarked on a path of transformation. The government, under the leadership of Prime Minister Narendra Modi, initiated a series of policy measures to address these vulnerabilities and promote sustainable economic growth. Key reforms included the Goods and Services Tax (GST) implementation, the Insolvency and Bankruptcy Code (IBC), and the “Make in India” campaign to boost manufacturing and enhance the ease of doing business.

Digital Revolution and Innovation:

One of the pivotal factors in India’s transformation has been its digital revolution. The rapid expansion of internet connectivity and the adoption of digital payment systems through initiatives like “Digital India” have led to increased financial inclusion and economic empowerment. Moreover, the country has witnessed a burgeoning startup ecosystem, with innovative companies across sectors like technology, e-commerce, and fintech attracting significant investments.

Foreign Direct Investment (FDI) Surge:

India’s commitment to economic reforms and its demographic advantage have attracted substantial foreign direct investment (FDI). Sectors like information technology, renewable energy, pharmaceuticals, and retail have witnessed significant inflows of FDI. The government’s efforts to simplify FDI regulations and improve the ease of doing business have further boosted investor confidence.

Infrastructure Development:

India’s focus on infrastructure development has been a driving force behind its transformation. Massive investments in transportation, energy, and urban development projects have not only created jobs but also improved connectivity and quality of life for its citizens. Initiatives like “Smart Cities” and the development of industrial corridors have modernized urban centers and bolstered economic growth.

Geopolitical Significance:

India’s economic resurgence has not only contributed to its own growth but has also elevated its global geopolitical significance. The country’s large and diverse market, skilled workforce, and strategic location have made it an attractive destination for international businesses seeking to expand their footprint in the Asia-Pacific region.

Challenges Ahead:

Despite its remarkable progress, India still faces challenges on its path to sustained growth. Income inequality, inadequate access to quality education and healthcare, environmental concerns, and bureaucratic red tape remain areas that require attention. Continued efforts to address these issues will be crucial for inclusive and sustainable development.

Conclusion:

India’s transformation from being part of the Fragile Five to becoming one of the world’s most sought-after investment destinations is as tory of resilience, reform, and innovation. The nation’s commitment to economic liberalization, infrastructure development, and technological advancement has propelled it into a new era of growth and global influence. As India continues to navigate its journey, its ability to overcome challenges and embrace opportunities will determine its place on the global stage for years to come.

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Your Antidote to Boring SIPs

The conventional wisdom surrounding systematic investment plans (SIPs) often paints them as dull and uneventful. However, we’re thrilled to introduce compelling solutions that redefines the investment landscape and empowers you to break free from the monotony (and at the same time create more wealth).

 

Our team has meticulously crafted three distinct SIP strategies designed to optimize returns and minimize risk. Each strategy leverages different mechanisms to ensure that your investments yield exceptional results.

 

A. Step-Up SIP: Gradual Growth with Every Year:

 

Our Step-Up SIP strategy introduces a controlled increase in investment amount year by year. This gradual escalation, by 10% annually, ensures a steady progression of your investment journey. For instance, an initial monthly SIP of Rs. 10,000 will evolve to Rs. 11,000 in the subsequent year, and further to Rs. 12,100 in the second year, and so forth. This incremental approach is tailored to align with your financial growth trajectory.

 

B. Dynamic SIP: Seizing Opportunity Amidst Volatility

 

Our Dynamic SIP strategy capitalizes on market volatility to optimize returns. Whenever the Net Asset Value (NAV) of the fund experiences a 10% correction, the monthly investment amount is doubled until the fund’s NAV regains its original value. For instance, a Rs. 10,000 monthly SIP could potentially surge to Rs. 20,000 if the fund’s NAV corrects by 10% and subsequently recovers to its original NAV. This strategy allows you to harness market downturns for greater gains.

 

C. Combination of Step-Up + Dynamic SIP: The Best of Both Worlds

 

Our Combination Step-Up + Dynamic SIP strategy amalgamates the benefits of controlled annual increments and market-responsive doubling. With this strategy, your SIP amount increases by 10% each year, and in addition, doubles when the fund’s NAV corrects by 10%. This synergistic approach optimally balances consistent growth with capitalizing on market dynamics.

Empirical Validation: Nippon India Growth Fund (erstwhile Reliance Midcap Fund) Backtesting

To substantiate the efficacy of our innovative SIP strategies, we conducted rigorous back testing using one of India’s oldest midcap funds, the Nippon India Growth Fund* (inception date: October 08, 1995). The results were nothing short of remarkable.

A conventional SIP approach with this fund since inception would have yielded the following outcomes:

However, the three approaches highlighted above yielded the following results:

In conclusion, our innovative SIP strategies offer a dynamic perspective on wealth accumulation, each tailored to suit your risk appetite and financial objectives. The empirical validation of these strategies using Nippon India Growth Fund underscores their potential to yield exceptional results.

As Warren Buffet famously stated, “Investing is simple but not easy.”

This principle holds true when examining the historical performance of the Nippon Growth Fund, which endured significant corrections of up to 50% during key market events [Dot Com Burst (2001), Global Financial Crises (2008), and COVID-19 (2020) and prolonged periods of minimal returns (2000-2004, 2010-2014, and 2017-2020). Remarkably, despite these challenges, the fund has delivered an impressive annualized return of close to 21%. This echoes Buffet’s wisdom to seize opportunities amid market fluctuations, as well as his counsel to be cautious when others are exuberant and bold when others are apprehensive.

*The decision to exclude Nifty/Sensex from our backtesting analysis was predicated on our perspective that over an extended temporal scope, Midcaps are poised to exhibit superior performance in comparison to Nifty/Sensex. This assessment is grounded in the belief that Midcaps present a more favorable risk-reward proposition than both smallcap and the Sensex/Nifty index.

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MONTHLY MARKET UPDATE & OUTLOOK – JULY’23

Strong growth since liberalization (1991)

While the GDP has grown by 12 times, market capitalisation of top 100 listed companies has grown by 46 times.

Jio’s Bajaj Finance moment?

Finally, the shares of demerged Jio Financial Services (‘Jio’) have been credited to the demat accounts of the Reliance Industries shareholders and are expected to list on August 28, 2023.

Currently, Jio holds the 51st position among the stocks listed on the Nifty 50, with a demerged price of Rs. 261.85. Investors hold a sanguine outlook concerning Jio’s prospective growth trajectory, anticipating a parallel course with that of India’s prominent Non-Banking Financial Company (NBFC) – Bajaj Finance.

Bajaj Finance has recorded an impressive increase in its Assets Under Management (largely comprising loans), surpassing the threshold of Rs. 2.7 lac crore (a substantial augmentation from Rs. 1000 crore in 2006), reflecting an annual growth rate of 39%. The exponential 410-fold surge in Profits After Tax (PAT) has propelled the stock price to an astonishing ascent of 130,000% (equivalent to 1300 times) within the same period.

Jio has strategically formulated plans to disrupt the financial services sector, encompassing domains such as life and general insurance, stock broking, and asset management. It has already established a collaborative endeavor with the world’s largest asset manager, BlackRock. Investors’ optimism towards Jio can be attributed to several factors:

  1. Robust Distribution Network: Jio is poised to tap into an existing captive audience, leveraging the extensive reach of its telecom services, which cater to around 400 million users. Additionally, the annual footfall of approximately 800 million patrons at Reliance Retail stores and the integration of 2 million merchants on the JioMart grocery platform bolster its distribution prowess.

  2. Esteemed Management Team: Jio has strategically appointed eminent individuals to steer its new venture, including:

    • Mr. KV Kamath, the former Chairman of Infosys, and erstwhile Non-Executive Chairman of ICICI Bank,

    • Mr. Rajiv Mehrishi, the former Comptroller and Auditor General of India (CAG),

    • Mr. Hitesh Sethia, former Chief of McLaren Strategic Ventures.

  3. Strong Credit Rating and Access to Cost-Effective Capital: With Reliance’s backing, Jio benefits from an enviable AAA credit rating, a distinction shared by only five other prominent Non-Banking Financial Companies (NBFCs).

  4. Favorable Valuation: Jio’s possession of approximately 6% equity in Reliance Industries translates to an initial net worth exceeding Rs. 1 lakh crore. This valuation propels Jio to the position of the fifth-largest financial services entity in India, trailing closely behind established banking giants such as HDFC, SBI, ICICI, and Axis.

  5. Substantial Resources for Expansion: Reliance Industries (RIL) has seamlessly transferred Rs. 15,500 crore in cash and liquid investments to Jio, equipping it with ample resources for expansion.

The underlying opportunity that Jio seeks to seize is vividly illustrated in the chart below. Over the last quarter-century, Indians have accumulated USD 12 trillion in savings, with an anticipated additional savings of USD 103 trillion (a remarkable increase by a factor of 90) projected ahead. This landscape presents a colossal opening for NBFCs such as Jio and Bajaj Finance to capitalize upon.

Quote of the month

Successful investing is investing that lets you sleep peacefully at night.

Success is not about who makes the highest returns or who makes the most money. It is about achieving our financial goals in a timely manner with the lowest possible risk.

-Gautam Baid, The Joys of Compounding

From the global leaders:

The Indian macro dataflow has continued to exhibit resilience and strength across various key indicators:

  • Manufacturing PMI: In July 2023, the Manufacturing Purchasing Managers’ Index (PMI) registered a value of 57.7, marking a decline to a three-month low. However, it remained within the expansion zone (>50) for the 25th consecutive month. This sustained expansion was underpinned by new orders’ growth, which reached its highest level since November 2022.

  • Services PMI: The Indian Services PMI achieved an impressive milestone, reaching a 13-year high level of 62.3. This robust performance was buoyed by strong demand, both domestically and in the export sector.

  • GST Collection: July 2023 witnessed GST collections amounting to Rs. 1.65 trillion, reflecting an 11% year-on-year increase. This achievement marked the seventeenth consecutive month of collections surpassing the Rs. 1.4 trillion threshold. It follows the record-setting collections of Rs. 1.87 trillion in April 2023.

  • Credit Growth: As of July 14th, 2023, credit growth surged beyond 14% year-on-year, a notable advancement from the 12.9% year-on-year growth recorded on July 15th, 2022.

  • Inflation: The Consumer Price Index (CPI) inflation rate for June 2023 displayed a rise, marking the first increase in five months, with a value of 4.81%, up from 4.25% in May 2023. This elevation was influenced by a less favorable base and an uptick in food inflation rates (+4.49%). Notably, the rate remains situated below the upper tolerance band of 6% set by the Reserve Bank of India (RBI).

  • Foreign Exchange Reserves: India’s foreign exchange reserves experienced a decrease by $2.901 billion, settling at $593.198 billion.

  • Trade Deficit: May 2023 witnessed a decline of -22% year-on-year in Indian Merchandise Exports, which amounted to $32.97 billion. Imports also underwent a contraction of -17.5% year-on-year, reaching $53.10 billion. As a result, India’s trade deficit narrowed by 8.7%, amounting to $20.13 billion. This trade scenario was influenced by weakened global demand, leading to exports reaching an eight-month low.

Collectively, these indicators portray a dynamic economic landscape, characterized by both accomplishments and challenges, as India navigates through evolving global dynamics and domestic circumstances.

Downs are temporary, ups are permanent:

Equity Market Overview:

  • In the month of July, the BSE SENSEX exhibited a notable rise of 2.8%, a trend mirrored by various other Indian indices.

  • The BSE Mid-cap and small-cap indices notably outperformed the SENSEX, recording gains of +5.7% and +7.4%, respectively.

  • The bullish sentiment witnessed in Indian indices was partly propelled by Foreign Institutional Investor (FII) flows. FIIs continued their engagement as net buyers of Indian equities in July, although at a reduced volume of +$4.2 billion, following a previous inflow of +$5.3 billion in June.

  • Sector-wise, all segments, with the exception of consumer durables, concluded the month on a positive note. Public Sector Undertakings (PSUs), power, and realty sectors notably stood out with substantial growths of +9.3%, +9.2%, and +9%, respectively. Conversely, consumer durables experienced a marginal decline with a degrowth of -0.3%.

  • Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 15,245 crore for the first time. This highlights the strong confidence Indian investors have in equities.

 

Fixed Income Landscape:

  • In its July meeting, the Monetary Policy Committee (MPC) opted to maintain all rates unchanged while retaining the stance as ‘withdrawal of accommodation.’

  • Government Securities (Gsec) yields remained within a certain range over the month, influenced mainly by global news developments. Gsec closed the month at 7.17%, a modest increase from June’s 7.11%, May’s 6.99%, and April’s 7.12%.

  • Core liquidity, which began the financial year at 0.5% of Net Demand and Time Deposits (NDTL), saw robust improvement due to factors such as RBI dividends, RBI’s intervention in forex markets, the demonetization of 2000 rupee notes, and seasonal patterns. Presently, core liquidity comfortably stands at around 2% of NDTL.

 

Market Outlook:

  • Recent updates in Indian macroeconomic data continue to showcase the economy’s resilience.

  • Supported by strong fundamentals and ongoing structural reforms, the economy is poised for a potential upswing in the long run.

  • Favorable demographics and demand dynamics contribute positively to the economic outlook.

  • While the long-term structural story remains intact, short-term volatility could arise from global growth-inflation dynamics and evolving geopolitical factors.

  • Valuations remain relatively high, and the business cycle maintains its positive momentum.

  • Considering a comprehensive analysis of the aforementioned indicators, it is deduced that the markets are currently in a “Boom” phase.

  • A positive stance is maintained for sectors aligned with the domestic economy, such as Banks, Automobiles, Capital Goods, and Manufacturing. The pharmaceutical sector also appears promising due to reasonable valuations.

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Contrarian investing: Why it pays to be different

Investing in the stock market requires a strategic approach and a thorough understanding of market trends and dynamics. One popular adage that resonates with investors worldwide is “Buy low, sell high.” This notion encapsulates the essence of investing in underperforming sectors.

Investing in underperforming sectors is often referred to as the contrarian approach. It involves taking a position opposite to prevailing market sentiment, which is usually bearish during times of sector underperformance. Contrarian investors believe that markets are not always efficient and tend to overreact to short-term events, leading to undervaluation of certain sectors or stocks.

Advantages of Investing in Underperforming Sectors

  1. Lower Entry Price: Investing in underperforming sectors allows investors to purchase stocks at lower prices. When the sector eventually rebounds, these investments can yield significant returns.

  2. Potential for High Returns: As underperforming sectors recover, stock prices have the potential to surge, providing investors with attractive gains.

  3. Reduced Downside Risk: While any investment carries inherent risks, buying into underperforming sectors at low prices can mitigate potential losses since stock prices are already discounted.

  4. Diversification Benefits: Adding underperforming sectors to an investment portfolio can enhance diversification, reducing overall portfolio risk.

  5. Long-Term Growth Opportunities: Industries experiencing temporary setbacks may have long-term growth prospects that investors can capitalize on.

Examples of successful contrarian investments in the Indian equity market:

IT Sector (2001-07):

During the dot-com bubble burst in the early 2000s, the Indian IT sector faced significant underperformance. However, contrarian investors who recognized the long-term potential of the industry were rewarded handsomely as the sector rebounded and experienced remarkable growth in subsequent years.

During 2000-01, IT sector corrected by 85% – providing a reasonable valuation to invest.

A SIP in ICICI Prudential Technology Fund (from 2001-2007) delivered an annual return of 44%.

Banking Sector (2008-10):

 

In the wake of the global financial crises, India’s banking sector faced considerable challenges. However, those who adopted a contrarian approach and invested in fundamentally strong banks witnessed substantial gains as the sector rebounded amidst economic recovery.

During 2007-08, banking sector corrected by 60% – providing a reasonable valuation to invest.

A SIP in Nippon India Banking Fund (from 2008-2010) delivered an annual return of 50%.

Auto Sector (2019-2023):

The Indian auto sector faced a slowdown during 2019-20 due to various factors, including economic slowdown, liquidity crunch, and changes in regulations. Many leading automobile companies’ stock prices experienced a significant decline. However, investors who recognized the sector’s importance in the Indian economy and its potential for recovery made strategic investments. As the economy gradually improved and consumer demand picked up, the auto sector started to rebound, leading to substantial gains for those who invested during the downturn.

During 2018-20, auto sector corrected by 60% – providing a reasonable valuation to invest.

A SIP in UTI Transportation Fund (from 2019-2023) delivered an annual return of 23.25%.

Pharmaceuticals Sector (2017-2021):

 

In 2017 & early 2018, the Indian pharmaceutical sector was under pressure due to increased scrutiny by regulatory agencies, pricing pressures in international markets, and increased competition. As a result, several pharma stocks witnessed a bearish trend, creating an opportunity for contrarian investors. Investors who had confidence in the long-term growth prospects of the Indian pharmaceutical industry and chose fundamentally strong companies with robust pipelines benefited from the sector’s eventual recovery.

 

During 2016-20, pharma sector corrected by 45% – providing a reasonable valuation to invest.

A SIP in DSP Healthcare Fund (from 2019-2021) delivered an annual return of 46%.

Smallcap funds:

Contrarian investing can be applied to funds based on market capitalization as well (Large, Mid and Small). Smallcaps performed very poorly from 2018-2020, correcting by 50-80% in some cases. In mid 2020, we recommended to invest in UTI Smallcap Fund to take the benefit of cheap valuation of smallcaps. Today, the portfolios highlight the return of the contrarian call we made.

While the contrarian approach can be rewarding, it is essential to acknowledge its inherent risks:

  1. Market Timing: Identifying the right time to invest in an underperforming sector can be challenging, as market sentiment can be unpredictable.

  2. Fundamental Analysis: Investors must conduct thorough fundamental analysis to ensure they invest in fundamentally strong companies within the underperforming sector.

  3. Patience and Long-Term View: Contrarian investments may take time to materialize (usually 2-4 years), requiring patience and a long-term investment horizon.

 
 Conclusion

 

Investing in underperforming sectors can be a prudent strategy for those willing to adopt a contrarian approach. By purchasing undervalued stocks during periods of underperformance (preferably through SIP), investors position themselves to benefit from potential future growth when the sector eventually rebounds. However, successful implementation of this strategy necessitates careful research, sound fundamental analysis, and a long-term perspective.

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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