Monthly Equity & Gold Outlook

 

Equity Outlook - November 2023

The S&P BSE Sensex declined by 2.9% in the month of October.  S&P BSE Midcap Index & S&P BSE Small cap Index declined by 3.4% and 1.7% respectively. Non-institutional flows have likely triggered a reversal in mid and small cap indices.

Market across globe were muted following the geopolitical crises and higher bond yields. Fed maintained status quo during the recently held policy meet despite hawkish commentary. As data points suggest a resilient US Economy, the US 10Y Treasury yield breached 5% during the month. The probability of global interest rates remaining high in the medium term appears high. As we have reiterated in the past, in such environment, when cost of capital is likely to remain higher than past few years, “value” as a style is likely to do well

Higher bond yields and ongoing geopolitical tension resulted in an outflow of USD 2.95 bn from FPIs (Foreign Portfolio Investors). Domestic Investors were buyers to the tune of ~USD 1.7 bn. Positive equity flows into mutual funds is likely to buffer the impact of potential outflows in FPI category.

Quantum Long Term Equity Value Fund (QLTEVF) saw a decline of 2.6% in its NAV in the month of October 2023; Tier-I benchmark S&P BSE 500 and Tier-II Benchmark S&P BSE 200 declined by 2.9% each. Our holdings in Financials, Healthcare and consumer discretionary contributed to the relative outperformance.  Relative outperformance in financial stocks were supported by a broking company and a general insurance name. Relative outperformance in consumer discretionary sector was contributed by an export focused auto company that witnessed margin benefits due to commodity tailwinds along with recovery in few export markets. Our overweight position in IT negatively contributed to the relative performance. While deal wins continue to be healthy, markets are worried about the near-term headwinds due to tough global macro. Though client spends could be deferred in the near term, it is bound to revive in the medium term as prolonged deferral in IT spends is bound to impact the business performance of end clients. Banking names reported muted performance during the month. Though credit growth remains healthy, most banking names have reported a decline in margins as liabilities are repriced to the prevailing higher rates.

Earnings are broadly in-line:

The recent quarterly earnings are broadly in-line with our expectation. While revenue growth moderated in most sectors, profitability improved as input costs moderated. Banks, Auto and Pharma results corroborate our positive view on their business cycle. Credit cycle continues to be favourable for Banks. With early signs of private capex revival, credit growth is likely to remain reasonable in the medium term. Most banks are seeing a revival in credit demand from MSME and mid-corporate segments.

 

Moderation in input prices, drug shortage in US market along with a reasonable pipeline of products helped Pharma companies. Consumer staple names are seeing a moderation in volume growth especially in the rural segment. IT service firms continue to see challenging demand environment as clients continue to be cautious on spends. Deal wins continue to remain healthy pointing to a revival in demand prospects in the medium term.

Festive demand trends are encouraging in most sectors. Auto volumes have reported healthy double-digit growth. Leading credit card companies have indicated supportive trends in card spends during the recent month. Real estate sales in key cities like Mumbai reported record sales during the recent month. Few durable companies are witnessing mixed trends. The collective trend doesn’t indicate a need for caution in earnings cycle at this point.

Near term risks in our view are overall inflation trajectory following weak monsoon, global slowdown, and political uncertainty as the country heads into elections next year. 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 equities based on their financial goals. Investors can allocate to equities in a staggered manner.

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.

Monthly Gold Outlook - Nov 2023

Recap

After starting October on a weak footing, gold recaptured the $2000 an ounce territory during the month as fresh geopolitical tensions in the Middle East outweighed the Federal Reserve’s hawkish stance. The geopolitical crises kept risk assets on the edge. Concerns about the crises spilling over to other parts of the oil-rich regions drove up crude prices.  Gold, which generally tends to thrive in turbulent environments, moved up sharply ending the month ~6.7% higher on the international as well as domestic fronts. However, the upside in gold was tempered by continued strength in the US currency and US Treasury yields, both driven by expectations of higher interest rates.

Overview

The situation in the Middle East remains volatile. Israel seems pursuing a full ground invasion, despite efforts by other world powers to dissuade them. While Israel’s role in the global oil supply is limited, chances of the fifth largest oil producer - Iran getting involved seem to be increasing by the day. An escalation in the war could have unsettling implications for financial markets.

According to preliminary estimates, the US economy grew at a 4.9% annualized rate in the September quarter driven mainly by consumer spending. This was more than double the last quarter and the fastest pace in nearly two years. This consumer strength will get tested in the coming months as pandemic-era savings dry up, loan moratoriums come to an end and higher interest rates trickle down to mortgage loans and credit card debt. Some very early estimates of Q4 GDP suggest a 1.1% growth, so some backtracking is likely very soon. Housing markets are increasingly showing signs of stress.

The International Monetary Fund (IMF) raised its global inflation forecast for 2024 to 5.8%, up from 5.2% three months ago. The IMF expects inflation in most countries will remain above targets until 2025, complicating central bankers’ jobs. The US Core Personal Consumption Expenditure Index, the Fed’s preferred inflation gauge, registered 3.7% on an annual basis, a slower pace than August’s 3.9%, but rose by 0.3% month-on-month, up from 0.1% in August.

The US government posted a $1.7 trillion budget deficit in fiscal year 2023, a year when the US economy positively surprised everyone. This 23% jump from the prior year thus raises concerns about the fiscal trajectory if the US economy deteriorates going forward which would warrant further fiscal spending. Rising debt levels at a time of historically high-interest rates, is creating a vicious cycle. The dire fiscal situation is likely to result in continued budget battles in the US, risking a government shutdown when the current funding bill ends in mid-November.

To finance the ballooning government debt, the US Treasury is expected to ramp up sales of longer-term debt. Meanwhile, demand looks lackluster as the largest buyer, the US central bank focusses on trimming its balance sheet, foreign buyers led by China and Saudi Arabia incrementally diversify away from the US and investors take a step back due to US credit rating downgrades. This, in addition to the Fed’s ‘higher for longer stance’ is pushing interest rates higher to levels not seen since 2007.

Outlook

The Federal Reserve’s decision to skip a hike again on 1^st November, even while the US economy continues to show unexpected strength and inflation slows sluggishly, tells us that the central bank is in a tricky spot. The recent rise in market-based interest rates have made financial conditions very restrictive, possibly doing some of the Fed’s work for them. Additionally, the full impact of their tightening is yet to be felt, making it appropriate to pause. Additional rate hikes at this juncture could result in overtightening and seriously damage the ‘soft landing’ that the Fed is aiming for. However, the Fed cannot declare tightening over with good growth and inflation still above target, which keeps the door open for another hike. This hawkish stance will continue to be a headwind for financial markets.

With US growth looking resilient for now and inflation yet to reach 2%, markets can expect continued hawkishness from the Fed in the near term, which makes Fed overtightening a big risk.

The resulting pullback in activity could trigger some policy easing by the Fed in 2024. While currently the first rate cut is expected only in mid-2024, the Fed’s hawkishness could get tested sooner in case of a major growth setback or a financial accident triggered by elevated interest rates. If the Fed is forced to cut rates while inflation remains above its target, that will be bullish for gold prices.

While global Gold ETFs saw outflows, domestic Gold ETFs saw inflows of INR 1659.5 crores in the September quarter. Central banks added 337 tons of gold in the quarter ending September, taking the year-to-date purchases to 800 tons, and supporting gold prices. 

Action plan this Diwali

Further short-term gains in gold from this level are possible if the geopolitical situation worsens. On the flip side, if the situation improves, we could see the geopolitical risk premium in prices come off. As fundamentals of higher interest rates and dollar strength would then come to the front, a reversal in prices is likely, which can be a good opportunity for investors to buy gold.

Downside, however, will be limited as risks of slowing global growth, potential Fed policy easing next year, and robust central bank gold buying will support trade in gold. Thus, while prices have run up quite a bit since the geopolitical crises, medium to long term prospects for gold are looking good. Investors can thus use a buy on dips approach this festive season to build their gold allocation[PL1] .

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.