Equity Outlook - October
The S&P
BSE SENSEX declined by 3.5% on a total return basis in the month of Sep 2022
while S&P BSE Midcap Index & S&P BSE Small cap Index declined by 2.1%
and 0.6% respectively. Most of the sectoral indices too had a similar trend
with S&P BSE India Power, S&P BSE Oil & Gas, and S&P BSE Realty
indices emerging as the top losers with a decline of ~8-9% each. Hike in taxes on
domestically produced crude, fuel exports, and rising gas costs were the key
triggers for correction in the Oil & Gas sector. Declining home
affordability due to rising interest rates was a sentiment dampener for the
real estate space. Meanwhile, defensive sectors like FMCG, Healthcare, and
Telecommunication saw marginal gains of 1.4% each.
The declining trend in global markets
continued amidst fears pertaining to multi-decadal high inflation and aggressive
monetary tightening by global central banks. Developed market indices like
S&P 500 and Dow Jones Industrial Average Index declined by 9.2% and 8.8%
respectively. Global risk-off sentiment was reflected in emerging market
indices as well with the MSCI Emerging Market Index correcting by 11.7%.
Amidst this
setting, FPIs turned sellers in September and sold Indian equities to the tune
of USD 903 mn. Domestic institutional investors counterbalanced the outflows and
turned buyers with purchases worth USD 1.6 bn. Since the start of the calendar
year 2022, FPIs have recorded a net outflow of USD 22.3 bn while DIIs recorded
a net inflow of USD 32.5 bn.
Quantum Long
Term Equity Value Fund (QLTEVF) saw a decline of 2.9% in its NAV in the month
of Sep 2022. This compares to a 3.2% decline in its Tier I benchmark
S&P BSE 500 and a 3.5% decline in its Tier II Benchmark S&P BSE 200. Telecom
and pharma sector were the major contributors to the outperformance. Cash in
the scheme stood at approximately 7.4% at the end of the month. The portfolio
is valued at 12.5x FY24E consensus earnings vs. the S&P BSE Sensex
valuations of 18.2x FY24E consensus earnings.
In India, macro
indicators are reasonably placed despite global uncertainties. GST collections
remained above INR 1.4 trillion for the 7th consecutive month. The
Manufacturing Purchasing Manager’s Index, published by S & P Global,
remained in expansion territory at 55.1 (A reading above 50 indicates
expansion) for September. A robust addition in jobs is reflected in the reduction
of the unemployment rate across urban and rural areas. Business updates
published by leading banks for the September quarter indicate a healthy loan
growth trend.
In its
scheduled policy meeting in September, the US Fed reiterated its resolve to
bring inflation back to the target range of 2%. It hiked the interest rates by
75bps taking the fed funds rate to a range of 3%-3.25%, the highest since early
2008. This was at a time when US inflation remained substantially higher than
its target range at 8.3% as of Aug. Persistent high inflation is likely to
force the US Fed to take further rate hikes during the upcoming policy meetings.
At home, RBI hiked the repo rate by 50 bps to 5.9%. RBI estimates CPI inflation
at 6.7% in FY23 against its target range of 4-6%. Though we could see a spill
over effect of further interest rate hikes by global central banks in India,
moderate inflation will help the RBI to slower the pace of rate hikes.
Moderation in global growth could further soften commodity prices giving a
respite to inflation.
Key factors that
could shape the trajectory of Indian markets in the near term are:
·
Oil price trend as India imports 85% of its crude requirements
·
Private Capex trajectory since the capacity utilization has surpassed
75% (Source: RBI Survey)
·
Commodity prices post normalization of the Chinese economy
·
Festive demand trends (This is the first festive season without covid
restrictions)
We expect
the performance of portfolio companies to be reasonable as the linkage to the global
economy is minimal for the majority of our investee companies. Banking, Auto
and IT together account for ~69% of the portfolio as of September. Banks
continue to depict cyclical low credit costs along with robust credit growth.
Auto companies are seeing record high unit realisation coupled with supply
chain normalisation and easing of input prices. The IT sector would benefit
from the increasing relevance of technology across the globe and by having
access to a large pool of engineering talent at a competitive cost.
The
valuation premium of India compared to global peers is likely to persist given
the stable domestic policies, favourable demographic dividend, and long-term
growth potential. The valuation of Indian markets indicated by the P/E (Price
to Earnings) ratio of benchmark indices is marginally higher than its historic
average, supported by a stable earnings trajectory. Nevertheless, we could see
volatility in the near term due to uncertain global macros. Past experience
shows us that such periods of volatility present good opportunities for patient
long-term investors. We urge investors to continue investing in equities in a
staggered manner through SIPs with a long-term view.
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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