Dear Friends:
“Tumult” is the word that comes to everyone’s mind if one is asked about the state of the world today. It is often said that “Change is the only constant” in this world, we would say “Frequent changes” are the only constant in this world. In our article dated January 6 titled “Goodbye 2022, good wishes 2023”, we had detailed the several changes that are reshaping our lives, especially in the last few years – Covid, Inflation Fight, Ukraine War, etc. In just 2 months after we wrote the article, the world is facing the banking crisis in the “developed” world. The “developed” world has been unable to withstand the aggressive rate increases of their Central Banks. Consequently, the skeletons have begun to tumble and the confidence in their banking system has been punctured, which had so painstakingly been restored after The Lehman crisis in 2008. Periodic disruptions in the West’s banking system highlights their low risk tolerance levels and their inadequate risk control mechanisms. Fortunately, the flames have been doused by their Central Banks and the Governments, atleast so far. We have not seen the last of rate increases and we have not seen the last of the mishaps. Hopefully, the tightening of liquidity from hereon, by the Central Banks would be more measured, to prevent widespread disruptions.
Back home, the RBI has followed suit by hiking rates by 250 bps in the last 1 year. There is an expectation of some more moderated hikes before they reach a pause or a stop button. We have always believed interest rates as a tool to control inflation does not work in a country like India, which has so many reasons for high inflation. The inefficiencies need to be addressed before interest rates become an effective tool to curb inflation. Despite the aggressive rate increases, consumer price inflation continues to be elevated. Food, fuel, healthcare, housing, education etc are all at their peaks and rising despite the sharp rate increases. If the growth decelerates due to rate hikes, pace of consumption which has already slowed could slow further. The rural and urban consumers are busy making two ends meet, hence, the question of discretionary spend from them does not arise. This is evident from the volumes notched up by the businesses in these sectors.
Despite the turmoil due to geopolitics, the Indian economy has done well, relatively. This could largely be attributed to the low base due to Covid and the aggressive spend by the Government on infrastructure and capex. After a long time, we are witnessing the much-required resurgence of the manufacturing sector. Sectors like engineering and capital goods, infrastructure, defence are witnessing hectic activity with their order books swelling. PLI driven capex is also aiding asset creation. Financials have done very well due to a pickup in the credit cycle and cleaner balance sheets. Export oriented sectors have taken a backseat due to global slowdown and rising protectionism. The BFSI segment of the West has always been the mainstay for the IT sector. Due to the banking issues, this hitherto resilient sector is facing some headwinds. Pricing issues in the US, has led to sharp slowdown in exports for drug exporters. However, those catering to the local markets are doing well. FMCG, consumer durables and automobiles (except CVs and EVs) are also facing rough weather due to consumption slowdown. Chemicals which were doing so well until the previous year have witnessed pressure on volumes, due to slowdown in the Chinese economy and Europe. Fluorochemicals have however been an exception. Policy changes too have played a role in some sectors being impacted.
The outlook for the current year would be shaped by geopolitics, inflation, monsoon, crude prices and the policymakers, as has always been the case. We only hope geopolitical issues donot escalate. There is some feeling that the Central Banks may not be very aggressive in hiking rates from hereon. In India, we may perhaps be done with the hiking cycle. This is reflected in the way the bond prices have behaved since the outbreak of the banking crisis. There are some worries about El Nino. If monsoon is inadequate, we could witness some impact on our GDP growth rates. The crude prices have been benign due to worries of a global recession. We hope they continue to stay that way. Our policymakers and regulators have been proactive in formulating policies and rules. They have been impactful both on the plus and the minus side. However, the government in India has been pro-business. We continue to see the same sectors doing well in 2023/24 too. If geopolitical situation improves, export-oriented sectors could begin to do well. We continue to be neutral on the prospects of energy, consumption, and healthcare sectors.
As always, it is very hard to give a view on the markets. It is easier to identify stocks for buying and selling. We believe that the stretched valuations that we witnessed in the previous year have been corrected to some extent although there is some further scope in sectors where growth has been impacted. Our longer-term view on the Indian markets continues to be promising both due to fundamental reasons and due to reducing dependence on FPIs. Indian mutual funds, portfolio management outfits, registered investment advisors continue to witness rising interest from Indian investors. Equity as a percentage to total investment pool has barely scratched the surface. Hence, as the allocation towards equity keeps on increasing, resilience and outperformance of Indian markets could become more glaring in the longer term. In the shorter term, it is fair to expect consolidation. However, cherry pickers like us would use every dip in the markets to optimise the client portfolios.
As far as our performance is concerned, we continue to outperform the benchmarks quite comfortably. Our customised portfolios have also done well. Our “Core and Satellite” strategy continues to impart robustness to our portfolios and help reduce volatility in them. So, what is a “Core and Satellite” strategy? The portfolio is divided into a Core portfolio and a Satellite portfolio. The Core part is one which is for the longer haul and is more resilient. It is designed for compounding. The Satellite part is the one which provides the incremental alpha. The mixed cap portfolio has a mix of largecaps, midcaps and small caps with the last one being a part of the Satellite Group. Our portfolios have adequate exposure to growth-oriented businesses like financials, realty, domestic pharma, niche chemicals, infrastructure, domestic focused auto ancillaries, etc. We are underweight on energy, healthcare, technology and FMCG. Going forward, we may increase weightage to infrastructure, add some defence stories and begin cherry picking from export-based businesses.
Before we end, we wish to thank all our clients for the tremendous confidence they have reposed in us. We wish to assure them it will always be our endeavour to deliver superior risk adjusted performance with integrity backed by efficient service levels.
Looking forward to a promising and enriching 2023/24!!
Paras Adenwala
Disclaimer
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