Equity Outlook for December- 2022 by George Thomas, Fund Manager, Quantum AMC, Quantum Mutual Fund

Equity Outlook – Dec 2022

The S&P BSE SENSEX advanced by 3.9% on a total return basis in the month of Nov 2022 while S&P BSE Midcap Index & S&P BSE Small cap Index advanced by 2.5% each. The rally was fuelled by easing inflation (CPI for Oct-22 at 6.8% Vs 7.4% in Sep-22, WPI at 8.4% in Oct-22 Vs 10.7% in Sep-22), moderation in crude prices (Brent Crude price declined by 7.9% in Nov) and Fed’s indication of moderate rate hikes.

Performance of Key Sectoral Indices:

Source: Bloomberg, Data as of Nov 30, 2022.

Past performance may or may not be sustained in the future.

Most of the sectoral indices gained during the month. Metals rallied on hopes of China opening up. Fed’s indication of moderate rate hikes fuelled rally in IT index. Advance in Oil & Gas index was triggered by amendments in gas pipeline tariff regulations which is positive for gas transmission companies. Banks especially PSU Banks performed well supported by persistence of credit growth and improving margins along with benign asset quality. Laggards during the month were Auto, Consumer Durables and Power indices. Barring tractor segment, Auto volumes were lower than expectation. Margin disappointments and intense competition led to muted performance of consumer durable index. Higher fuel costs and profit booking led to a decline in power index.

Quantum Long Term Equity Value Fund (QLTEVF) saw an increase of 3.8% in its NAV in the month of Nov 2022. This compares to an increase of 3.5% each in its Tier I benchmark S&P BSE 500 and Tier II Benchmark S&P BSE 200. Oil & Gas, IT and Banks were major contributors to the outperformance. Cash in the scheme stood at approximately 5.9% at the end of the month. The portfolio is valued at 12.2x consensus earnings vs. the S&P BSE Sensex valuations of 17.1x based on FY25E consensus earnings.

Federal Funds rate in US was hiked by 75bps in November-22 policy meet. Fed hinted at slower pace of rate hikes as it will consider the lag effect of large rate hikes delivered in the past few months. Inflation print is expected to ease across globe due to high base and moderation in growth. S & P 500 and Dow Jones Industrial Average recorded gains of 5.6% and 6.0% respectively. Chinese markets saw sharp gains supported by ease in covid zero policy. Gains in China was reflected in 14.8% gain in MSCI Emerging Markets Index. FPIs turned buyers in Indian equities as pace of future rate hikes is expected to slow down. FPIs purchased stocks to the tune of USD 4.4 bn while DII sold equities worth USD 181 mn during the month (Data as of Nov 28,2022). 

Though market valuations are marginally above its long-term average, healthy earnings growth would support markets in the medium term. Consumer spending remains buoyant as reflected in recent quarterly GDP print. Indian economy is unlikely to see a material deceleration as ~60% of our GDP is derived from domestic consumption. Loan growth trends remain healthy (Bank Credit Growth at 17.8% in Oct-22 Vs16.4% in Sep-22 & 6.8% in Oct-21) supported by retail and working capital demand. Industrial credit is showing signs of revival backed by improving utilisation trends (>70% as per RBI Survey). Tax collections remain healthy aiding the Government to continue its robust capex programs. The recent correction in crude augurs well for India’s inflation and economic stability. Expectations of good rabi crop and elevated crop prices are expected to support rural demand.

Interest rate actions by central banks, geo-political situation, oil price trajectory, private capex revival and rural demand recovery trends are the key watchpoints in the near term. We remain constructive on Indian equities with a long-term perspective.