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MONTHLY MARKET UPDATE & OUTLOOK – FEB’24

Newton’s fourth Law of Motion: “…returns decrease as motion (trading) increases.”

Sir Isaac Newton is widely renowned for his groundbreaking contributions to science, particularly for his development of calculus and his formulation of three fundamental laws of motion:

  1. Every object persists in its state of rest or uniform motion unless acted upon by an external force.

  2. The force acting on an object is directly proportional to its mass and acceleration.

  3. For every action, there is an equal and opposite reaction.

However, beyond his scientific achievements, Newton’s involvement in the financial markets reveals a lesser-known aspect of his life. In the spring of 1720, Newton became embroiled in the frenzy surrounding the South Sea Company, one of the most sought-after stocks in England at the time. Initially, Newton wisely sold his shares, realizing a substantial profit of £7,000. Yet, succumbing to market speculation and influenced by the prevailing euphoria, he reinvested at a significantly higher price, ultimately suffering a loss of £20,000. This experience left a lasting impact on Newton, who adamantly avoided any discussion related to the South Sea Company thereafter.

Estimates suggest that Newton’s losses, adjusted for inflation, would amount to as much as £40 million in today’s currency.

The South Sea Bubble, as it came to be known, has been labeled variously as the world’s first financial crash, a Ponzi scheme, and a cautionary tale of groupthink leading to speculative mania.

 

Newton, typically a prudent investor, primarily entrusted his funds to stable government bonds, which provided steady returns. However, the allure of quick gains and the fear of missing out (FOMO) prompted him to deviate from his conservative approach, resulting in significant financial setback.

 

Reflecting on Newton’s misfortune, renowned investor Warren Buffett remarked in his 2005 annual shareholder letter that while Newton’s laws of motion demonstrated unparalleled genius, his abilities did not extend to the realm of investing. Buffett humorously suggested that had Newton not been traumatized by his financial loss, he might have discovered a hypothetical “Fourth Law of Motion,” illustrating the inverse relationship between investor returns and excessive trading activity.

 

In summary, Sir Isaac Newton’s foray into the financial markets serves as a cautionary tale, reminding us that even the most brilliant minds are not immune to the irrationalities of human behavior and the pitfalls of speculative fervor.

Quote of the month

The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high returns simply imply that an asset has become more expensive and is a poorer, not better, investment.

– Billionaire investor Ray Dalio, Founder, Bridgewater Associates

“India offers best structural growth story among large economies”: UBS

 

“India likely to grow at 10% for 10-20 years”: Deloitte’s Romal Shetty

 

“India Rises As An Emerging Markets Darling”

Economic Indicators Overview:

 

Manufacturing PMI: In February 2024, the Purchasing Managers’ Index (PMI) for the manufacturing sector rebounded to 56.9, reaching a five-month high and extending its expansionary streak for the 32nd consecutive month.

 

Services PMI: India’s services sector exhibited robust growth in February, with a PMI reading of 60.6.

 

GST Collection: India’s gross revenues from the Goods and Services Tax (GST) grew at a three-month high pace of 12.54% in February, surpassing ₹1.68 lakh crore.

Equity Market Overview:

  • The S&P BSE Sensex and Nifty 50 both edged higher by 1.0% and 1.2% respectively in February 2024.

     

  • The S&P BSE MidCap rose by 1.5%, while the S&P BSE SmallCap fell by 1.1%.

     

  • In terms of S&P BSE sectoral performance, the top performers in February 2024 were S&P BSE Oil & Gas (6.7%), S&P BSE Auto (6.4%), and S&P Realty (6.3%). S&P BSE FMCG (-2.2%) was the only sector that underperformed.

     

  • Foreign Institutional Investors (FIIs) were net buyers (Rs 1,539 crores), but it was the surge in Domestic Institutional Investors (DIIs) inflows (Rs 25,379 crores) through Systematic Investment Plans (SIPs) that bolstered the markets.

     

  • An impressive milestone was reached as Mutual Funds’ Systematic Investment Plans (SIPs) hit a record high of ₹19,186 crore, surpassing January’s ₹18,838 crore.

 

Fixed Income:

  • In the near-term, bonds markets are expected to stay positive mainly due to the expected beginning of a rate cut cycle

  • Additionally, an increase of FPI debt inflows and attractive global rate cycles will also keep debt markets high

  • 10 -yr -g sec yield is expected to be in the range of 6.5% to 6.75%

  • 1-year T-Bill yields are expected to ease with gradual improvement in the banking system liquidity

Looking Ahead:

 

India’s macroeconomic situation remains robust, with the recent budget underscoring the government’s commitment to strengthening economic health. However, despite this strength, valuations are not currently favorable. As such, we advise an investment strategy focused on hybrid and multi-asset allocation schemes, allowing for dynamic management of exposure across different asset classes.

 

Our primary recommendation for new investors considering lump-sum investments is to explore hybrid and multi-asset allocation schemes. These offer flexibility in adjusting equity exposure and reallocating to other promising asset classes opportunistically.

 

Existing investors are advised to maintain their positions, as India’s long-term growth narrative remains compelling. For those seeking to increase equity exposure, we suggest focusing on schemes with flexible investment mandates that can adapt to changes in market capitalization and sectors.

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Monthly Market Update & Outlook – Jan’24

UPI Goes Global: Empowering Transactions Worldwide

Unified Payments Interface (UPI) has emerged as a pivotal force in India’s digital transformation journey, revolutionizing the landscape of financial transactions.

 

UPI’s impact transcends borders as it gains traction beyond India, becoming a preferred choice for digital transactions globally.

 

Recently, UPI has achieved significant milestones with its official launch in Sri Lanka and Mauritius. Furthermore, Indians can now utilize UPI for transactions in Singapore, Bhutan, Nepal, France, UAE, and Oman. This expansion underscores the widespread recognition of UPI’s potential to reshape the future of global payments, garnering appreciation from both government entities and businesses alike.

 

Another significant use case arises for the 30 million-strong Indian diaspora in the Middle East, Southeast Asia, and North America, facilitating seamless remittance to India through UPI networks. This underscores UPI’s role in providing cost-effective and efficient cross-border payment solutions.

 

With a staggering Compound Annual Growth Rate (CAGR) of 168%, the value of UPI transactions has surged from ₹1 lakh crore in FY 2017–18 to ₹139 lakh crore in FY 2022–23. UPI’s dominance in India’s digital payment ecosystem is evident, representing 62% of digital payment transactions during FY 2022–2023 and driving overall digital payment adoption in the country.

 

Furthermore, according to Global Data research, the dominance of cash transactions has significantly declined, dropping from 90% of the total volume in 2017 to less than 60% in 2021, signaling a paradigm shift towards digital payments.

 

In conclusion, UPI’s global expansion signifies a new era in digital payments, empowering individuals and businesses worldwide. As we witness these transformative developments, we remain committed to providing you with valuable insights and analysis through our Monthly Market Outlook.

Quote of the month

The greatest investment a young person can make is their own education, in their own mind. Because money comes and goes. Relationship comes and go. But what you learn once stays with you forever.

 

– Warren Buffet, CEO Berkshire Hathaway

“OpenAI to invest heavily in India, reveals the country has the 2nd highest number of ChatGPT users” – OpenAI’s Chief Strategy Officer Jason Kwon

 

“Foxconn India to spend Rs 1,200 cr to build a factory, scale up operations”

 

“India nears landmark $100 bn investment pact with Switzerland, Norway”

Economic Indicators Overview:

 

Manufacturing PMI: In January 2024, the Purchasing Managers’ Index (PMI) for the manufacturing sector rebounded to 56.5, marking a four-month high and extending its expansionary streak for the 31st consecutive month. This uptick was driven by moderate input cost inflation and a significant increase in new orders.

 

Services PMI: India’s services sector exhibited robust growth in January, reaching a six-month high with a PMI reading of 61.8, up from 59 in December. This surge was propelled by heightened demand and sales activity.

 

GST Collection: January 2024 saw GST collections amounting to INR 1.72 trillion, marking a 10% year-on-year increase. This marks the twenty-third consecutive month of collections surpassing the INR 1.4 trillion mark, following record collections of INR 1.87 trillion in April 2023. Notably, eight out of ten months in the fiscal year recorded collections exceeding INR 1.6 trillion. The sustained high levels of tax collection can be attributed to rising compliance, increased formalization of the economy, festive demand, and enhanced administrative efficiency.

 

Credit Growth: As of January 12, 2024, scheduled commercial bank credit growth stood at 20.3% year-on-year, showing a significant increase from the 16.47% observed on January 13, 2023.

Equity Market Overview:

  • In January 2024, India’s NIFTY index concluded the month with no significant change. Conversely, major global indices experienced positive growth, with the S&P500 (+1.6%), the Euro 50 (+2.8%), the Morgan Stanley Capital International World (MSCI) (+1.1%), and the Japanese NIKKEI (+8.4%) all posting gains.

     

  • The S&P BSE Mid-cap and Small-cap indices outperformed the large-cap index, rising by +5.3% and +7.1%, respectively.

     

  • In terms of sectors, Oil & Gas, PSU, and Realty emerged as the top three performers, registering growth rates of +12.6%, +11.2%, and +9.4%, respectively. Ten out of S&P BSE’s 13 sectoral indices ended the month on a positive note.

     

  • Foreign Institutional Investors (FIIs) recorded negative flows into equities for January 2024, amounting to -$3.35 billion, following a positive inflow of +$5.85 billion in December. On the other hand, Domestic Institutional Investors (DIIs) continued to be net buyers of Indian equities, with inflows totaling +$3.3 billion, up from +$1.5 billion in the previous month.

     

  • An impressive milestone was achieved as Mutual Funds’ Systematic Investment Plans (SIPs) reached a record high, surpassing Rs. 18,839 crore for the first time.

Fixed Income:

  • The budget revealed a significant surprise with better-than-anticipated gross borrowing numbers for the next year, totaling Rs. 14.1 trillion, compared to market expectations of Rs. 15.3 trillion.

  • In its February 2024 policy, the RBI opted to maintain the policy rate unchanged. Looking ahead, the size and timing of RBI’s rate cut cycle may be influenced by the evolving domestic inflation outlook and global policymakers’ actions. We anticipate potential rate cuts by RBI in the second half of the calendar year 2024, possibly in August or October.

     

  • Both corporate and government securities (G-secs) yield curves exhibit considerable flatness. As we look forward, we expect a bias towards curve steepening in anticipation of RBI rate cuts. This could be advantageous for short to intermediate duration funds, with potential capital gains from an absolute decline in yields benefiting long duration funds.

     

  • Core inflation dipped below 4% in December 2023 and is expected to remain subdued in the fourth quarter (January-March) of FY24, supported by favorable base effects and muted sequential momentum.

Looking Ahead:

 

  • India continues to maintain its position as one of the fastest-growing major economies, bolstered by factors such as its demographic advantage, deregulation, policy reforms, digitization, and robust demand fueled by aspirational spending.

  • The overall outlook for domestic capital markets remains positive, supported by resilient domestic demand and indications of stabilization in both global and domestic monetary tightening.

  • A prudent interim budget, coupled with a focus on fiscal consolidation and policy continuity, has the potential to mitigate external risks and attract global investors.

  • Looking forward, sentiment appears buoyant, underpinned by India’s comparatively favorable macroeconomic conditions, the potential for increased foreign investment inflows, and expectations of policy continuity ahead of the general elections.

  • From an equity market standpoint, some positives have already been factored into valuations, suggesting that return expectations in the near term should be moderate.

  • We believe that strategies focusing on Large Cap stocks offer a favorable risk-reward profile, while asset allocation products can help mitigate downside risks.

  • Proper asset allocation aligned with investment objectives and risk tolerance is crucial for optimizing risk-return dynamics. Asset allocation funds can play a pivotal role in reducing volatility and achieving a more balanced portfolio mix.

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2024 Outlook: The Great Reset

It is with great pleasure that we present Onesta Capital Ventures’ 2024 outlook: The Great Reset.

The past year has defied expectations in numerous ways. What was anticipated as the most significant global recession in history has, instead, evolved into an unforeseen delay, showcasing unexpected resilience in the growth of numerous economies. As forecasted in our 2023 outlook titled “Concerned but not alarmed,” the most challenging phase of inflation seems to have passed, with central banks worldwide reaching the peak of the interest rate cycle. This foresight led us to advise our clients on the potential for a stronger market, a recommendation that has borne fruitful outcomes, notably evidenced by the outstanding performance of Indian equities.

Looking ahead, we envision 2024 as a pivotal year where investors are poised to benefit from the fundamental principles of conventional asset allocation, as elaborated upon in this report. To equip ourselves for the forthcoming year, we draw upon a wealth of international and domestic research reports, coupled with the extensive experience of fund managers, to diligently identify opportunities and risks.

Irrespective of the fluctuations that markets may present, our reliance on one another and the enduring relationships we have cultivated over time serve as the cornerstone of our commitment to delivering our very best to you. It is an honor for us to stand by your side as your financial partner.

Sincerely,

Harish Mehta – Managing Partner & Head, Insurance & Group Products

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Monthly Market Update & Outlook – Dec’23

The fall of ORIGINAL Nifty 50: A key lesson from history

Even before the Nifty 50 index was launched in India in 1996 by the NSE, the late 1960s and early 1970s witnessed the term “Nifty 50” becoming synonymous with a select group of high-flying stocks that captured the imagination of investors in the United States. These companies, renowned for their rapid growth and perceived stability, were considered the darlings of the stock market during a period of economic expansion. However, the era of the Nifty 50 was not destined to last, and their fall marked a pivotal moment in financial history.

 

The Nifty 50 Stocks:

The original Nifty 50 comprised blue-chip stocks, including industry giants such as IBM, Coca-Cola, General Electric, McDonald’s, Procter & Gamble, and Xerox. These companies were characterized by high price-to-earnings (P/E) ratios and were regarded as “one-decision” stocks – investments that investors were encouraged to buy and hold for the long term, regardless of market conditions.

 

The Rise:

The Nifty 50 stocks enjoyed a remarkable ascent during the 1960s, driven by a booming economy and a widespread belief in the perpetual growth of these companies. Investors were drawn to the stability and consistent performance of these industry leaders, leading to elevated stock prices and valuations.

 

The Fall:

The fortunes of the Nifty 50 took a dramatic turn in the early 1970s. Economic conditions shifted, and rising inflation, coupled with changing interest rates, created headwinds for these high-flying stocks. As the bull market that had propelled the Nifty 50 to extraordinary valuations came to an end, investors faced a harsh reality.

 

“The Nifty Fifty comprised the stocks of companies that were considered the best and fastest-growing – so good that nothing bad could ever happen to them. For these stocks, everyone was sure there was ‘no price too high.’ But if you bought the Nifty Fifty when I started at the bank and held them until 1974, you were sitting on losses of more than 90% . . . from owning pieces of the best companies in America. Perceived quality, it turned out, wasn’t synonymous with safety or with successful investment.” – Howard Marks, Founder of Oaktree Capital Hedge Fund.

 

Lessons Learned: The fall of the Nifty 50 stocks imparted crucial lessons to the investment community. Diversification emerged as a key strategy to mitigate risk, as concentrating investments in a handful of popular stocks proved to be a precarious approach. The episode underscored the importance of fundamental analysis and a careful assessment of a company’s financial health, rather than blindly following market trends.

 

Moreover, the decline of the Nifty 50 stocks contributed to a broader awareness of the cyclical nature of financial markets. It served as a reminder that market conditions can change, and prudent risk management is essential for navigating the uncertainties of investing.

Quote of the month

I am not emotional about investments. Investing is something where you have to be purely rational and not let emotion affect your decision making – just the facts. Short term market and economic prognostication is largely a fool’s errand, we invest according to a strategy that makes the need to rely on short term market or economic assessments largely irrelevant.

 

– Billionaire Investor Bill Ackman, Founder of Pershing Square

From the global leaders:

 

“Bullish on India as it has everything in place to accelerate trajectory”: Starbucks Global CEO Narasimhan

 

“India’s growth story is going to be distinctive, unique”: HUL’s Rohit Jawa

 

“India on cusp of investment bull run that will stretch beyond 2024”: Natixis’s Trinh Nguyen

Economic Indicators Overview:

 

Manufacturing PMI: India’s manufacturing PMI fell to an 18-month low of 54.9 in December as output and orders cooled.

 

Services PMI: India’s services PMI ended 2023 on a high note, rising to 59.0 in December from 56.9 in November.

 

GST Collection: In December 2023, GST collections reached Rs 1.65 trillion, slightly below the monthly average of Rs 1.66 trillion for the year. Despite a 10.3% year-on-year increase, December’s GST receipts marked a decline since October’s peak, suggesting moderation after pre-festive supply chain replenishment.

 

Inflation: India’s retail inflation is expected to show a slight rise in December, while core inflation could fall below 4 per cent for the first time since March 2020, according to Barclays.

 

Foreign Exchange Reserves: India’s forex reserves rose to $623 billion in December, hitting a 22-month high.

Equity Market Overview:

  • In December 2023, there was a notable surge in large-caps and mid-caps, with small caps making significant gains as well.

     

  • The S&P BSE Sensex and Nifty 50 experienced impressive increases of 7.8% and 7.9%, respectively, in December 2023. The S&P BSE MidCap and S&P BSE SmallCap also showed appreciation, with gains of 7.5% and 5.7%, respectively.

     

  • On the S&P BSE sectorial front, the top performers in December 2023 were S&P BSE Power (18.2%), S&P BSE PSU (15.3%), and S&P Oil & Gas (12.0%).

     

  • Foreign portfolio investors (FPI) made record monthly purchases of Indian equities, totaling 661.35 billion rupees ($8 billion) in December.

     

  • In a noteworthy achievement, Mutual Funds’ Systematic Investment Plans (SIPs) reached an unprecedented milestone, hitting Rs. 17,610 crore for the first time.

Fixed Income:

  • During the early December policy, the Reserve Bank of India (RBI) maintained the status quo on the policy rate and left the monetary stance unchanged, aligning with consensus expectations. While emphasizing the gradual decline in the inflation outlook and a soft core inflation print, the RBI expressed caution regarding the potential impact of recurring food shocks on headline inflation prints.

     

  • With one-to-five-year AAA assets yielding between 7.70% – 7.90%, valuations for high-quality fixed income have corrected meaningfully and look outrightly attractive.

Way ahead:

In 2024, sustained FII interest is expected owing to India’s economic growth. Although the market valuation is deemed fair, a potential 2024 rally will enhance risks at elevated levels. Large caps appear relatively more attractive. Several central banks are nearing the end of interest rate hikes amid a downward inflation trend. Despite this, an immediate interest rate cut isn’t anticipated. Domestic bond markets will be impacted by supply-side dynamics and increased inflows due to the inclusion of Indian bonds in global indices. Favorable liquidity conditions make the shorter end of the curve appealing, providing substantial accrual income opportunities in short-term bond funds.

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MONTHLY MARKET UPDATE & OUTLOOK- NOV’23

World’s Most Expensive Stock – A Tale of MistakeTranscending into Masterstroke

In the 1989 letter to shareholders, Warren Buffett candidly addressed his mistakes of preceding 25 years, identifying the acquisition of control in Berkshire Hathaway as a pivotal misjudgment. Despite recognizing the challenges in its textile manufacturing business, he was tempted by the seemingly attractive price of $14 in 1965.

 

Buffett coined the term “cigar butt approach” to describe this strategy, wherein one acquires a stock at a low price with the intention of selling it for a modest profit, even if the long-term performance of the business is suboptimal. However, Buffett acknowledged the inherent flaws in this strategy, emphasizing that in challenging businesses, solving one problem often gives rise to another—akin to the perpetual presence of cockroaches in a kitchen. Moreover, any initial advantage gained is swiftly eroded by the business’s low returns.

 

Recognizing the shortcomings of the cigar butt approach, Buffett advocated a shift towards acquiring businesses with excellent return on equity and promising long-term prospects.

 

Early on, he implemented this revised strategy, strategically acquiring various businesses under the Berkshire umbrella. Over the ensuing 88 years, Buffett successfully transformed Berkshire from a loss-making textile company into one of the largest reinsurance and investment entity, boasting substantial stakes in industry giants such as Apple, Coca-Cola, and American Express. Notably, the share price appreciated from $19 to an impressive $566,570.00 (Rs. 4.8 crore)– yielding an annual return of over 20% for nearly 9 decades, solidifying Berkshire Hathaway’s status as one of the most valuable stocks.

 

A profound quote from Buffett encapsulates the essence of his strategic wisdom: “Time is the friend of wonderful business and enemy of mediocre.“

Quote of the month

As I’ve come to discover, investing is about much more than money. So as your wealth grows, I hope you will also come to realize that the money is largely irrelevant. And what you will want to do with the bulk of your wealth is give it back to society.

—Guy Spier, Founder, Aquamarine Fund

From the global leaders:

 

“Why India Inc is better placed among emerging markets”: The Hindu

 

“Most Americans I know with money want to invest in India”: Zerodha CEO Nithin Kamath

 

“Move aside, China. India will drive Asia’s growth in the next few years”: S&P Global

Economic Indicators Overview:

 

The Indian economy exhibits promising signs with elevated levels of Goods and Services Tax (GST) collections, a surge in festive season demand, stable retail inflation, subdued input inflation, expanding core sector outputs, and heightened credit growth.

 

Manufacturing PMI: The Manufacturing Purchasing Managers’ Index (PMI) for November 2023 stood at 56, marking an improvement from the 8-month low of 55.5 recorded in October 2023. This indicates the sector’s sustained expansion for the 29th consecutive month, driven by reduced price pressures and increased demand from clients.

 

Core Sector Production: In October 2023, the index of eight core sector industries, including Natural Gas, Coal, Refinery Products, Crude Oil, Cement, Electricity, Steel, and Fertilizers, experienced a robust growth of 12.1%. This follows an 8.1% jump in September 2023.

 

Services PMI: India’s service sector activity expanded at its lowest pace in November, falling to 56.9 as compared to 58.4 in October.

 

GST Collection: November 2023 saw GST collections amounting to INR 1.68 trillion, indicating a significant YoY increase of 15%. This marked the twenty-first consecutive month of collections surpassing the INR 1.4 trillion mark, following the record collections of INR 1.87 trillion in April 2023. Collections for 6 out of 8 months in this fiscal year crossed INR 1.6 trillion.

 

Inflation: October 2023 witnessed a drop in the Consumer Price Index (CPI) inflation rate to a four-month low, settling at 4.87%, down from 5.02% in August 2023. The deceleration in the CPI rate was attributed to a slowdown in price rises for housing, clothing, and footwear. Meanwhile, food inflation remained elevated and unchanged, registering at 6.61%.

 

Foreign Exchange Reserves: India’s foreign exchange reserves continued to remain high for the straight third week and rose to more than a four-month high of $604.04 billion as of December 1.

Equity Market Overview:

 

  • In November, India’s NIFTY index concluded on a positive note, recording a month-on-month growth of 5.5%.

  • Outperforming the large-cap index, the BSE Mid-cap and Small-cap indices displayed robust performances, registering gains of 9.6% and 9.4%, respectively.

  • Sector-wise, the top performers for the month were Realty, Oil & Gas, Healthcare, and Power indices, posting impressive returns of +18.9%, +12.7%, +11.4%, and +11.0%, respectively. Notably, all 13 of BSE’s sectoral indices closed the month in positive territory.

  • Foreign Institutional Investors (FIIs) displayed a positive trend in equity flows for November, with a net influx of +$1.1 billion, rebounding from the -$2.9 billion recorded in October 2023. Meanwhile, Domestic Institutional Investors (DIIs) continued to be net buyers of Indian equities, contributing +$1.5 billion compared to the -$3.4 billion in the previous month. Year-to-date figures indicate that Foreign Portfolio Investment (FPI) net buying stands at US$14.2 billion, while DIIs have invested US$20.5 billion in stocks.

  • In a remarkable achievement, Mutual Funds’ Systematic Investment Plans (SIPs) reached an unprecedented milestone, reaching Rs. 17,073 crore for the first time.

     

Fixed Income:

 

  • During the early December policy, the Reserve Bank of India (RBI) maintained the status quo on the policy rate and left the monetary stance unchanged, aligning with consensus expectations. While emphasizing the gradual decline in the inflation outlook and a soft core inflation print, the RBI expressed caution regarding the potential impact of recurring food shocks on headline inflation prints. The RBI revised the economic growth projection for FY24 upward to 7% (from the previous estimate of 6.5%) while maintaining the FY24 inflation projections at 5.4%.

  • The 10-year Government Securities (G-sec) yield, which fluctuated between 7.35% and 7.39% in October, opened the month at 7.36% but gradually decreased to the range of 7.24-7.28% during the month. The 10-year G-sec closed the month at 7.28% (compared to 7.35% in Oct 2023 and 7.21% at the end of Sep 2023).

  • In November 2023, core liquidity (comprising system liquidity and Government balances) declined from 3.3 trillion in October 2023 to 2.5 trillion by the end of November, attributed to festive season demand and credit uptake.

Way ahead:

 

  • Market sentiment in the equity space improved as risk aversion decreased, supported by positive news globally and locally. Factors such as the deceleration in US inflationary expectations and declining oil prices, despite production cuts and geopolitical tensions, contributed to the positive sentiment.

  • On the domestic front, activity indicators remained buoyant, and the corporate results season witnessed growth in profitability driven by lower costs. While overall revenue growth remained relatively muted, expectations are for improvement in the coming quarters. Businesses dependent on rural areas experienced ongoing stress. The Reserve Bank of India raised concerns about retail unsecured credit and increased capital requirements for banks and non-banking financial companies (NBFCs).

  • Looking ahead, the sentiment appears positive, supported by election results in a few states, instilling expectations of political continuity in the upcoming general elections. However, valuations remain elevated compared to long-term averages, and geopolitical challenges persist, potentially impacting the growth trajectory.

  • We believe that Large Cap-oriented strategies across Large Cap and Flexi/Multi Cap categories seem well-positioned, while asset allocation products can aid in managing downside risks.

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Monthly market update & outlook- Oct’23

Rs. 2,125 crore Pizzas

On May 22, 2010, a programmer named Laszlo Hanyecz made history by completing the first-ever documented real-world transaction with Bitcoin. What was the purchase, you might ask? Two pizzas. The astonishing part? He paid a staggering 10,000 bitcoins for those pizzas.

 

At the time, the exchange seemed inconspicuous, with a value of around $41 USD. However, fast forward to today, and the value of Bitcoin has skyrocketed, transforming those 10,000 bitcoins into a jaw-dropping fortune (Rs. 2,125 crore). At the Bitcoin all-time high, those Bitcoins were valued at Rs. 5,175 crore. What started as a simple transaction for a meal has become a symbol of the unpredictable journey and transformative power of digital currencies.

 

We find this tale both intriguing and emblematic of the ever-changing landscape in which we operate. It highlights the potential of emerging technologies to reshape industries and redefine value.

Quote of the month

Over the long run, well run businesses create a lot of value irrespective of the macroeconomic environment. Do we seriously think Amazon, JP Morgan, Michelin, Nestle, Siemens, Tesco, Walmart, Zara & other excellent businesses are held hostage to inflation and fiscal deficit? If the business & stock price performance of exceptional companies is immune to macroeconomic perturbations, aren’t we, as investors in those companies, better off ignoring the economy?

 

—Pulak Prasad, founder of Singapore based Nalanda Capital

From the global leaders:

The macroeconomic landscape in India continues to demonstrate resilience and robustness across key indicators:

 

Manufacturing PMI: In October 2023, the Manufacturing PMI registered a value of 55.5, marking a slight decline from September’s 57.5. Despite this decrease, the index has sustained its expansionary phase (>50) for the 28th consecutive month. The deceleration in output expansion, the slowest in 8 months, can be attributed to a modest increase in new orders, which reached a 12-month low.

 

Services PMI: The Services PMI for the same period recorded a value of 58.4, reflecting a decrease from September’s 61.0. Nevertheless, the index has maintained its growth momentum for the 27th consecutive month, consistently staying above the 50-mark that separates expansion from contraction.

 

GST Collection: In October 2023, GST collections amounted to INR 1.72 trillion, marking a YoY increase of 13%. This achievement marks the twentieth consecutive month of collections surpassing the INR 1.4 trillion threshold, making it the second-highest recorded since the inception of the regime. Notably, the record collection of INR 1.87 trillion in April 2023 remains the highest.

 

Inflation: The CPI inflation rate for September 2023 eased below the Reserve Bank of India’s (RBI) comfort zone of 6%, settling at 5.02%. This marks the first time in three months that inflation has dipped below the target. The deceleration in the CPI rate can be attributed to a slowdown in food basket inflation, which registered 6.56% in September 2023, compared to a 9.94% rise in August 2023. Meanwhile, WPI inflation remained in negative territory, reaching a six-month high of -0.26% in September 2023, a slight increase from August’s -0.52%. Notably, food, fuel, and chemicals continued to experience deflation.

 

Foreign Exchange Reserves: India’s foreign exchange reserves saw a notable increase of $4.7 billion, reaching $590.78 billion and attaining a seven-week high.

 

Trade Deficit: In September 2023, Indian Merchandise Exports experienced a YoY decline of -2.6% to $34.48 billion, while Imports growth contracted by -15.04% YoY to $53.84 billion. The strengthening of the US dollar contributed to a narrowing of India’s trade deficit by $19.37 billion.

 

Credit Growth: As of October 6, 2023, Scheduled Commercial Bank Credit growth reached 19.32% YoY, surpassing the observed YoY growth of 17.93% on October 7, 2022.

Equity Market Overview:

  • The BSE SENSEX (-3.0%) fell in October, in tandem with other benchmark Indian indices.

  • BSE Mid-cap underperformed the SENSEX and was down -3.4%. The BSE Small Cap index outperformed, with a fall of -1.7% over the month.

  • Sector-wise, Realty, FMCG, Auto and consumer durables indices were the top 4 performers over the month, clocking +3.7%, -0.9%, -1.2%, and -2.3%, respectively. The worst performing index was the BSE Power index, which fell by -4.9%.

  • Market breadth declined MoM, with stocks trading above their respective 200-day moving averages declining to 69% from 85% from September 2023, and the advance decline line was down 11% MoM.

  • Net FII (Foreign Institutional Investors) flows into equities were negative for October (-$2.6Bn, following -$1.8 Bn in September 2023). DIIs (Domestic Institutional Investors) remained net buyers of Indian equities (+$3.4 Bn, from +$2.6 Bn from last month). YTD, FPI net buying stands at US$12.1 Bn, while DIIs have bought stocks worth US$19 Bn.

  • Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 16,928 crore for the first time. SIP contributions since the start of financial year 2024 have surpassed the significant milestone of ₹1 lakh crore

 

Fixed Income:

  • Oct’23 saw fixed income yields rising on backdrop of global cues (sharp rise in geo-political risk, US treasury yields and crude price) & OMO concerns.

  • 10-year G-sec yield (which was moving in the range of 7.20-7.24 at the start of the month), rose sharply, post Israel- Hamas conflict & OMO announcement in RBI Policy, to move in range of 7.35-7.39% during the month. It did ease to 7.30-7.32 range mid-month driven by better-than-expected monthly inflation print. 10 yr Gsec closed the month at 7.35% (Sep 2023 end: 7.21%). Money market rates remained elevated during the month on tight liquidity driven primarily by festive season and higher government balances. 10-year Term premia (10 yr over 365 days) rose to 21 bps (Sep 2023: 15 bps).

  • October 2023 saw complete reversal of Incremental Cash Reserve Ratio (ICRR) hike leading to increase in liquidity during the month. Core system liquidity (system liquidity + Government balances) improved from 3 trillion in Sep 2023 to 3.3 trillion by end of Oct-23, despite festive season demand.

November 2023 presents a set of critical events to monitor:

 

War and Oil: The ongoing conflict between Israel and Hamas poses a potential risk for equity markets. The threat of contagion and disruptions in oil supply, compounded by cuts from major producers like Saudi Arabia and Russia, may introduce heightened volatility in oil prices.

 

Earnings Season: The current Q2FY24 earnings season in India has generally exceeded expectations. However, the market remains cautious about post-results price performances. The remaining results will likely influence earnings revisions across the spectrum of Indian stocks.

 

State Election Outcomes: Elections in five states (Rajasthan, Chhattisgarh, Madhya Pradesh, Telangana, and Mizoram) in November 2023, ahead of the 2024 general elections, are crucial for shaping public sentiment. These outcomes will be closely watched as a significant factor impacting equity markets.

 

Festive Season Demand: November 2023 anticipates a boost in India’s private consumption and demand with the onset of the festive season, starting with Diwali. This period is expected to witness increased festive demand across the country.

 

Central Banks Commentary: Notable actions by central banks include the US Federal Reserve maintaining interest rates at a 22-year high, the Bank of Japan widening its yield target band, and the European Central Bank holding rates steady after ten consecutive hikes in October 2023. The Reserve Bank of India, in its October 2023 meeting, kept the key policy repo rate unchanged for the fourth consecutive time. Caution in response to energy and food inflation shocks was evident, suggesting potential divergences in policy stances in the coming months.

 

Market View:

 

Global economic trends pose challenges, with geopolitical events, high US bond yields, and slowing growth in the developed world presenting near-term headwinds. Conversely, India’s macroeconomic indicators remain robust, featuring strong manufacturing growth and improving economic activity, despite slowing inflation.

 

Considering local and global factors, it’s notable that the current market enthusiasm might be overlooking events like forthcoming elections and global developments such as rising crude oil prices. Large Caps, along with Asset Allocation products like Multi Asset Funds and Balanced Advantage, seem relatively well-positioned. Investors, wary of market swings, may consider a staggered approach aligned with their risk appetite and investment goals.

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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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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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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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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.  
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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