Monthly Equity View – Feb’ 23 by Christy Mathai, Fund Manager- Equity, Quantum AMC

Equity Outlook – February 2023

The S&P BSE SENSEX saw a decline of -2% on a total return basis in the month of January 2023 while S&P BSE Midcap Index & S&P BSE Small cap Index declined by -2.6% and -2.4% respectively.  IT, Consumer Discretionary, Metals, Cap Goods and FMCG outperformed the index with positive returns.

IT companies, despite the macro headwinds reported decent numbers in a seasonally weak quarter with stable orderbook.  In Auto, all major OEM witnessed margin improvement driven by price hikes and normalisation in raw material costs. Metals rallied on news flow of China re-opening as it lifted the quarantine provisions. Within Cap goods sector, order book remains healthy with positive outlook on private capex reviving. Most of the other sectors trailed the benchmark with larger declines in Power, Energy and Banks. Majority of decline in these sectors is attributed to negative news flows around a specific conglomerate. Banks declined despite good quarter gone by mainly on the fears of outsized exposure to this specific conglomerate.

Globally S&P 500 advanced 6.28% in USD terms, tech heavy NASDAQ grew 10.7% in January. Indices across Europe did very well, Euro Stoxx 50 is up 11.5% in USD terms. Broader rally in these indices were driven by narrative around inflation moderating and expectation of Fed going slow on rate hikes. MSCI EM advanced by 7.9% driven by China which retuned 9.9% (USD Terms). India, after a strong CY22 is underperforming other global indices with -0.96% (USD) in the month gone by.

In terms of flows for the month, FPIs continued to be sellers in Indian markets to the tune of USD $3.5 bn. Domestic institutional investors were buyers with purchases worth USD 3.53 bn. Trends seems to be in line with what we witnessed in calendar year 2022, where FPIs have recorded a net outflow of USD 16.5 bn while DIIs recorded a net inflow of USD 35.8 bn.

Quantum Long Term Equity Value Fund (QLTEVF) saw a decline of -0.8 % in its NAV in the month of January 2023. This compares to a decline of -3.3% and -3.5% each in its Tier I benchmark S&P BSE 500 and Tier II Benchmark S&P BSE 200. Auto, IT and Utilities were major contributors to the outperformance. Cash in the scheme stood at approximately 4.5% at the end of the month. The portfolio is valued at 11.8x consensus earnings vs. the S&P BSE Sensex valuations of 15.7x based on FY25E consensus earnings; thus, displaying value characteristics.

Despite the correction in the Indian markets valuation across market capitalizations remain marginally ahead of historical medians. Some of the pockets such as staples/durables/internet remain expensive.  Given the interest rate across the globe continuing to remain elevated w.r.t past decade, one can expect moderation in these expensive pockets. 

Current market backdrop of relatively higher interest rate and broad-based growth suits value as a style. If we broadly look at past cycles as shown above, the outperformance/underperformance cycle of respective style be it value or growth tend to be long.

Incrementally we continue of the view that India is in broader economic upcycle driven by capex recovery which will help corporate earnings over the medium term. Recent Union Budget continues reinforce this thesis, with public capex slated to increase by 37% with bulk of spending in Road & Transport/Railways and Defense. Over a period this should have multiplier impact on the economy and help rival in private capex. Our portfolio is well positioned to capture this economic upcycle. We remain overweight on financials with a decent mix of holdings in both lending and non-lending names. We are positive on consumer discretionary especially 2 wheelers, which trade at attractive valuations and overweight on IT Services.

In our view, key monitorable in the near future are: Revival in capex, interest rate actions by central banks, evolving geo-political situation, China opening up impact on inflation and oil price trajectory. We remain constructive on Indian equities with a long-term perspective.