Equity Outlook - August 2003
The S&P BSE Sensex rose by 2.8% in the month of
August, supported by corporate earnings and strong flows. S&P BSE Midcap
Index & S&P BSE Small cap Index increased by 5.8% and 7.5%
respectively. Almost all major sectors were positive with Realty, Utilities,
Capital goods, Metals, Healthcare and Telecom leading the index. The results
reported so far, points to margin recovery driven by moderating input prices in
most of the consumption-oriented
themes. Technology, Banks, FMCG and Consumer durable were the laggards
in the month gone by. Most of the
economic activity indicators remained strong; GST collection improved to Rs
1.65 trillion (+11% yoy), PMI Services/manufacturing witnessed improvement,
other indicators such credit growth, E-way bill growth and power generation
remained resilient. Monsoons are progressing well though there are some
disruptions is certain parts of the country and CPI inflation print is expected
to be above 6% in July driven by food inflation; this can have a bearing on
near term policy rate trajectory.
US FOMC in line with market expectation hiked
interest rate by 25bps in July; the labour market continues to remain tight in
the US, though the inflation trajectory is moderating. Global markets did well during
the month, with hopes of soft landing for the developed nations and broader
technology rally. S&P 500 advanced by 3.2%, the broader MSCI EM index rose
by 6.2% and MSCI World Index rose 3.3%; India trailed some of the EM peers.
In terms of flows, FPI flows were positive for
fifth successive month with inflows of USD 4.2bn. Domestic institutional
investors were sellers to the tune of USD 0.3 bn. Valuation within the large
cap bucket remain marginally higher than long term average whereas valuation within
mid/small caps remains elevated given the sharp rally in the past few months. The domestic flows have
been particularly strong in the Mid/Small category in the past several months;
constituting over 42% of total flows YTD. Hence some caution is warranted
within this bucket.
Quantum Long Term Equity Value Fund (QLTEVF) saw an
increase of 4.5% in its NAV in the month of July 2023; Tier-I benchmark S&P
BSE 500 and Tier-II Benchmark S&P BSE 200 which advanced by 3.9% and 3.5%
respectively. Our allocation to Healthcare, Utilities and financials helped in
outperformance w.r.t benchmark. Financials which include banks and NBFCs
continue to witness favourable credit demand along with reasonable asset
quality. Price stability in US market coupled with green shoots from product
pipeline translated to positive performance of pharma sector. Outperformance
from utilities segment was contributed by a power generation company, which
would benefit from a healthy capacity addition across conventional thermal and
renewable sources. In terms of portfolio characteristics, cash in the scheme
stood at approximately 6.4% at the end of the month. The portfolio is valued at
13.5x consensus earnings vs. the S&P BSE Sensex valuations of 18.1x based
on FY25E consensus earnings; thus, displaying value characteristics.
A Mixed Result season so far!
- IT
sector results were weak; some of the midcap and ER&D IT companies
outperformed the larger peers. While forward looking TCV trajectory remain
stable and management commentary is subdued, highlighting the pause in
discretionary spends and slow decision making by clients. While next few
quarters can be challenging, if one were to have a longer-term view; we
are hopeful of demand recovering. As in the past cycles Indian IT vendors
typically end up capturing higher global market share in a downcycle and
are currently trading at compelling valuations with attractive FCF yields.
- Credit
growth remained strong for most of the Banks/NBFC. Along the expected
lines, NIMs have started normalising post stellar FY23, where asset
repricing was quite sharp. Most of the private banks continues to be very
well capitalised and asset quality across segments remain benign. Credit
cost can cyclically move up but will be within comfortable range, with no
major risk markers turning adverse. We believe banks are quite
attractively placed on growth, profitability, and valuations over the
medium term hence remain overweight position for us.
- Pharma
have seen improvement in pricing environment in US markets; pipeline of
launches also looks quite attractive. After a period of underperformance
pharma sector seems to have turned the corner.
- Margin
have improved across consumption-oriented themes, mainly due to input cost
moderation. There are some early signs of Rural demand recovery even as
inflation moderates, whereas urban consumption has remained strong. 2W
volumes have improved on low base, exports volumes are still subdued. Real
Estate continues witness traction as affordability has improved in major
cities with unsold inventories declining. Pockets within Infra, building
materials have done well on the back of Government capex.
Near term risks in our view is overall inflation
trajectory, global slowdown, and political uncertainty even as country heads to
elections next year. To conclude, our portfolio is well positioned to benefit
from cyclical economic upcycle over the medium term with major overweighs being
Financials and Autos. While there could be uncertainty emerging globally or in
India; 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.
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