Monthly Equity View – June 23 by Christy Mathai, Fund Manager- Equity

 

Equity Outlook – June 2023

The S&P BSE Sensex rose by 2.8% in the month of May, supported by corporate earnings and improving macros. S&P BSE Midcap Index & S&P BSE Small cap Index increased by 6.3% and 5.5% respectively. Margins expansion driven by price hikes and initial signs of volume recovery led the rally in autos, the realty sector continued to do well given strong pre-sales by developers and IT also rebounded following a tough April month.  The Metals and Energy sector underperformed the index driven by a weak global outlook.  

Global indices had a mixed performance during the month. S&P 500 advanced by 0.4%, the broader MSCI EM index declined by 1.6% and MSCI World Index declined by -0.92%. Rally in S&P 500 was concentrated in specific pockets within Technology. The decline in the EM index was driven by weaker than expected activity levels in China, which is a major constituent of the MSCI EM Index.

In terms of flows, FPI turned positive for the third successive month with inflows of USD 4.5bn. Domestic institutional investors were sellers to the tune of USD 376 mn. Improving domestic consumption with a relatively stable macro environment amidst global slowdown puts India in a favourable light among the other countries.

Quantum Long Term Equity Value Fund (QLTEVF) saw an increase of 3.7 % in its NAV in the month of May 2023, in line with Tier-I benchmark S&P BSE 500 and Tier-II Benchmark S&P BSE 200 advanced by 3.7% and 3.6% respectively. Certain large positions within the banking space, energy and metals were the drags in our portfolio. Cash in the scheme stood at approximately 4.7% at the end of the month. The portfolio is valued at 12.5x consensus earnings vs. the S&P BSE Sensex valuations of 17.4x based on FY25E consensus earnings; thus, displaying value characteristics.

Earning season points to broad-based improvement in Consumption

The recent earning season highlights an improving trend in overall demand and consumption. Cap-goods sector saw improvement in order books and Real estate witnessed continued positive sales traction; Auto witnessed improvement in volumes across various segments. Credit growth across banks was strong especially retail; some of the banks reported record profitability driven by low credit cost and better NIMs.

From a macro standpoint, India stands out relative to peer countries; inflation is rapidly moderating in India, current benign crude price and improving exports (especially non-IT exports) put India in a comfortable position w.r.t CAD. Recent GDP print was also strong; with certain capex-intensive segments showing growth; Gross fixed capital formation (GFCF) saw a decent increase with investment activity picking up. Broadly the earnings trajectory is trending well and the Indian economy despite the global turmoil is on strong footing.

Our portfolio is well-positioned to participate in the cyclical recovery of the Indian economy. We are overweight on consumer discretionary especially 2-wheelers, here we clearly see early signs of volume recovery.  Some of the OEMs in our portfolio have additionally been able to pass on the input price increases in their respective segments, leading to margin improvements, which is positive. We believe this sector also trades at quite attractive valuations which gives us a reasonable margin of safety. 

The other key overweight for us is the BFSI space; here we are especially positive on private banks. FY23 witnessed sharp improvement in ROE/ROA driven by NIMs and lower credit cost; growth also rebounded from a low base with increased participation from corporates. While some of the growth parameters may moderate after a strong performance in FY23, we still believe banks are quite attractively placed on growth, profitability, and valuations over the medium term.  Lastly, we are also overweight on IT, which at the moment is going through a rough patch. Here while the next few quarters can be challenging, we are hopeful on demand recovering and Indian IT firms being able to capture a higher global market share. We believe some of these firms trade at compelling valuations with quite attractive FCF yields.

Summing up, we find India in a comfortable spot to benefit from a cyclical economic upcycle over the medium term and while there could be uncertainty emerging globally or in India, as the country is heading into national elections next year; investors should not be unnerved by the near-term volatility and focus on allocating prudently to equity based on their financial goals. Any sharp correction due to near-term headwinds can offer additional valuation comfort and should be used to allocate more to 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.