Equity
Outlook – March 2023
The S&P BSE SENSEX saw a decline
of -0.8% on a total return basis in the month of February 2023 while S&P
BSE Midcap Index & S&P BSE Small cap Index declined by -1.8% and -2.9%
respectively. All sectoral indices
barring capital goods clocked negative returns during the month. Corporate
results indicated a slowdown in consumption spending, especially in the value
segment.
Strong US economic indicators hint at the
possibility of higher rates for longer, triggering a decline in global markets.
S&P 500 declined by 2.4% during the month. China stocks were dragged down
by weak domestic demand and muted exports due to the global slowdown. MSCI EM
registered a decline of -6.5%.
Domestic macro indicators have
moderated over the recent month. GDP growth slowed to 4.4% in Q3-FY23, partly
due to a high base. Weak global demand led to a slowdown in exports. CPI inflation in Jan 2023 rose to 6.5% due to
costly food and fuel prices. Though recent corporate results indicate a mixed picture
of domestic consumption, there are early signs of rural recovery. Buoyant tax
collections, credit demand, government capex, and a potential revival in
private capex augurs well for the cyclical economic uptick.
In
terms of flows for the month, FPI selling has reduced over the month. FPIs were
sellers in Indian markets to the tune of USD 647 mn. Domestic institutional
investors were buyers with purchases worth USD 2.3 bn. Trends seem to be in
line with what we witnessed in the 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 -2.8 % in its NAV in the month of February 2023. This compares to a decline of -2.7% and -2.8% each in its Tier I benchmark - S&P BSE 500 and Tier II Benchmark - S&P BSE 200. The majority of the holdings were in red following market trends. Gas based utility holdings gained during the month as input prices started normalising. Banks have relatively performed better as the recent results corroborated the persistence of an ongoing favourable cycle. Cash in the scheme stood at approximately 4.0% at the end of the month. The portfolio is valued at 11.4x consensus earnings vs. the S&P BSE Sensex valuations of 15.9x based on FY25E consensus earnings; thus, displaying value characteristics.
While India’s strong fundamentals would
ensure reasonable long-term returns, managing risk is equally important to
ensure a good investment experience over the long term. Unlike the popular
perception, higher risk needn’t always result in superior returns. Historic
risk measures like standard deviation mayn’t capture the fund’s preparedness to
handle adverse scenarios in the future.
In QLTEVF/QTSF (Tax Saving Fund), risk
management is ensured using three guard rails:
a. The margin of safety: We attempt to buy stocks for less than their worth. The risk of low returns needn’t necessarily emanate from weak fundamentals. Overpaying for a business can lead to losses despite the lucrativeness of the business model. Buying at a discount ensures a lower downside even when the company doesn’t perform on expected lines.
b. Liquidity: During times of weak flows, liquidating stocks with thin liquidity mayn’t result in realizing their recently displayed prices. The act of buying and selling can have an impact on stock prices. We ensure to buy into stocks with a minimum average daily turnover of $ 1 mn.
A liquid strategy also ensures a larger capacity for the fund and its ability to sustain the track record at larger AUMs.
c. Corporate Governance: Quantum as a group has established the governance filter right from its inception in 1996. To ensure shareholders benefit from the prospects of companies we own, founders of businesses must treat us fairly as minority investors.
Some of the popular signs of weak governance are:
·
Companies that attempt to consistently
grow at a faster pace than supported by organic cash flows. When the funding
tap dries, such companies would need to raise capital at adverse valuations
leading to destruction in shareholder wealth
·
A large quantum of related party
transactions at unfair pricing terms
·
Aggressive accounting practices to
portray a favorable situation than the actual reality
·
Expanding working capital cycle which
is not in line with growth in revenue
·
Merger/Divestment of group companies
at unfavorable valuation disproportionately favoring the promoters.
In most
cases, the historic behaviour of promoter groups gives an indication of the
potential behaviour.
Once any of the above risks materialise,
the company can trade at sub-par valuations for a prolonged period. It is
important to keep a watch on the risk management framework of the fund house to
ensure a good investment experience.
The key near-term monitorable for the
Indian markets are private capex trends, rural recovery, inflation trajectory,
and subsequent central bank actions. We remain constructive on Indian equities
with a long-term perspective.
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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