S&P BSE SENSEX increased by 0.44%
on a total return basis in the month of October 2021. It has had a large underperformance
vs. its developed market peers such as S&P 500 (7.0%) & Dow Jones
Industrial Average Index (5.9%). After this month’s underperformance, the YTD
performance of SENSEX & S&P 500 is very similar.
The broader market has underperformed the
S&P BSE Sensex this month. The S&P BSE Midcap Index was flat during the
month and the S&P BSE Smallcap Index declined by -0.33%. With this month’s
performance, the Midcap & the Smallcap index have given the return of 42.1%
& 55.7% respectively on a YTD basis. Buoyed by good quarterly results, Consumer
Discretionary & Banking sectors stood out in terms of returns appreciating
by 4.5% each
Quantum Long Term Equity Value Fund
(QLTEVF) saw a 1.04% appreciation in its NAV in October 2021. This compares to
a 0.37% appreciation in its benchmark S&P BSE 200. Cash in the scheme stood
at approximately 6.3% at the end of the month. Some of the sectors like Autos & Banking,
where the fund has significant exposure generated better return than the
benchmark, resulting in outperformance of the fund this month. QLTEVF’s
portfolio positioning remains tilted towards cyclical as they benefit the most
from a broad-based economic recovery.
Half-yearly results indicate improving demand outlook, but operating
costs are inching up
Equity Markets had a parabolic &
polarized move in Aug-2021 & Sept-2021 (Sensex moved up by 11% in two
months). This means we entered the H1FY22 result season with elevated
expectations. Market reactions have been extreme so far both in terms of
rewarding companies which beat expectations & punishing those which have missed
them. Technology & Banking sectors results have been strong. Some of the
consumption companies though have reported strong revenue growth but have
missed on profitability due to high input costs. Overall, till the end of
October, results have been a mixed bag, with a slight bias towards companies
seeing EPS upgrades vs. those seeing downgrades.
The management commentary post in post
result conference calls indicates improvement in demand across sectors.
However, amidst all these talks of demand recovery, managements are quick to
add a comment on pressure on operating margins due to higher input cost
inflation. Corporates clearly are facing a dilemma of either live with margins
erosion or risk of jeopardising the still frail demand recovery by price
hikes.
By the mid of this month as earnings
season comes to an end, we will be able to clearly comment on the continuity of
the earning upgrade cycle (an important driver for equity markets) which
started in Q2FY21.
FPI outflows due to taper tantrums
October-21 has seen FPI outflows to US$
1,892 mn vs inflows of US$ 1,792 mn in the month of September-21. This is the
highest monthly FPI selling since March 2020. On a YTD basis, FPI inflows stand
at US$ 6,462 bn. Seen in the light of US Federal Reserve’s imminent tapering. The
volatility in FPI flows is not entirely unexpected. However, in the medium
& long term, India’s nominal GDP growth will look better than the western
world & inflows should resume after a pause. DIIs have remained net buyers
for October 2021 to the tune of US$ 202 mn.
The
second leg of the macroeconomy cycle & equity market returns
Having picked most of the low hanging
fruits in the last 12-18 months, macroeconomy & stock markets are entering a
more difficult phase of economic recovery & equity performance. The
resurgence of Covid-19, the U.S Fed’s tapering & subsequent interest rate
hike and higher than expected inflation are some of the macro variables which
can increase market volatility in the next few months. However, from a
medium-term perspective, the two key drivers of equity markets; a) Corporate
earning upgrade & b) liquidity appear sanguine.
·
With the economic recovery in place, we
are in the first meaningful corporate earning upgrade cycle since 2014.
Sectors with strong multiplier effects in the economy like real estate
& IT are seeing steady recovery. An uptick in private CAPEX cycle in the next
few quarters, if it happens, will further confirm this trend and will be
positive for equities.
·
On liquidity, US Federal Reserve’s
imminent tapering is clearly the most significant risk to FPI flows in the near
term. However, in the medium & long term, India’s nominal GDP growth
will look better than the western world. This makes it a sought-after
destination for yield & growth-seeking long term global investors.
Domestic institutions are again seeing positive flows in the last few
months from retail investors. The biggest risk to liquidity is retail flows to
direct equities which is at an all-time high. Near term volatility in return
expectation can result in sharp outflows from direct retail investors.
After the recent rally, the benchmark indices appear
expensive. Nonetheless, markets are heterogeneous & not everything is cheap
or expensive at the same time. Investors
should look at active funds with portfolio P/E multiples ideally more
attractively valued than the benchmark but offering a very similar or higher
growth profile. Lower P/E reduces the drawdown risk, but a similar growth
outlook indicates the portfolio’s ability to capture the upside sufficiently.
From a long-term financial planning
perspective, investors should create a diversified equity portfolio through a
mix of 5 to 6 schemes of varying styles and market capitalizations. A value
fund as the anchor fund can be (20% to 25% of total exposure) layered with
funds of different market capitalizations. Thematic-ESG funds could also be
explored. It is advisable to review & rebalance the portfolio every six
months. Given the near-term volatility, a time horizon of 3 to 5 years seems
good for any equity investment.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video
are for general information and reading purpose only and do not constitute any
guidelines and recommendations on any course of action to be followed by the
reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering /
communicating any indicative yield on investments made in the scheme(s). The
views are not meant to serve as a professional guide / investment advice /
intended to be an offer or solicitation for the purchase or sale of any
financial product or instrument or mutual fund units for the reader. The
article has been prepared on the basis of publicly available information,
internally developed data and other sources believed to be reliable. Whilst no
action has been solicited based upon the information provided herein, due care
has been taken to ensure that the facts are accurate and views given are fair
and reasonable as on date. Readers of this article should rely on
information/data arising out of their own investigations and advised to seek
independent professional advice and arrive at an informed decision before
making any investments.
Risk Factors: Mutual Fund investments are
subject to market risks, read all scheme related documents carefully.
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