Recap
Some of the
geopolitical premium in gold unwound in November as the situation in the Middle
East remained contained and did not turn into a wider conflict. On the other
hand, renewed expectations of softer Fed policy in 2024 and resulting sharp
correction in US 10-year Treasury yields from 4.9% levels to 4.3% and the US
dollar from 106 to 103 levels pushed up gold. Prices ended the month at $2038
per ounce, up 2.01%. Domestic gold prices touched all-time highs, ending the
month up 1.89%. Risk assets also did well given the strong recovery in risk
appetite.
The US
economy created fewer jobs, wage growth decelerated, continuous claims for
unemployment insurance rose and the unemployment rate went up in October.
Cooling US labor markets reinforced expectations of a looser monetary policy.
In addition, the US Treasury department lowered its borrowing estimates for the
fourth quarter of 2023 pushing US Treasury yields lower.
The Fed’s Senior
Loan Officer Opinion Survey showed that tight lending standards and weak
demand for loans in the third quarter persisted at US banks. The US ISM
Manufacturing PMI was unchanged at 46.7 in November 2023, indicating continued
contraction in the manufacturing sector. The year-over-year growth rate of
Industrial Production in October came in at negative 0.70%, the lowest level
since February 2021. US Retail sales decreased by 0.1% month-over-month in
October 2023, after six months of increases. Moody’s slashed its outlook for
the US's credit rating from stable to negative, pointing to economic risks of high interest rates and ballooning government debt levels.
Meanwhile, uptick
in US consumer confidence in November after three consecutive monthly declines and
US government’s data revisions pointing to excess savings now lasting into 2024,
suggested consumer strength.
Despite the mixed economic signals from the US economy, a growth setback in the US is looking more and more likely as cumulative effects of the Fed’s tightening show up and the US economy loses some of its tailwinds. Fixed income market’s classic recession indicator, the 10 year- 2-year Treasury yield curve continues to signal a US recession.
Outlook
There's
growing consensus that the rate hiking cycle is over. The Fed is widely
expected to leave rates unchanged at 5.25% to 5.50% at its December meeting. Markets
are also expecting roughly 125bps of cumulative interest rate cuts by December 2024, with the first cut
expected as soon as March 2024.
While we
too are cautiously optimistic that the rates have peaked, rate cut expectations and this
month’s move in yields are vulnerable to a reversal incase of a higher for
longer Fed stance.
The rise in
market-based interest rates and resulting tightening of financial conditions in
the run up to the Fed’s November 1st meet possibly weighed on their decision to
skip a hike. However, the skip was perceived as dovish by the markets and resulted
in a sharp drawdown in yields following the Fed’s interest rate decision,
effectively loosening financial conditions and making it more likely for the
Fed commentary to stay hawkish in the near future.
Also, US
consumer prices data for October showed a slowdown in the headline rate but stickiness in core inflation. The US economy expanded even more
impressively in the third quarter than initially thought at 5.2% as per second
round of preliminary estimates. This strength in prices and growth will likely
keep the Federal Reserve’s bias towards more restrictive monetary policy in the
very near term.
While a
status quo in rates will be perceived as dovish and keep gold prices supported,
hawkish Fed commentary could put a lid on prices. Further upside in gold from these levels can
be expected as and when the Fed turns accommodative. A deteriorating US
economic and macro landscape in 2024 is expected to accelerate this Fed pivot.
Investors
can use price dips to build their gold allocation.
Source
: Bloomberg , RBI
Equity Outlook - December 2023
S&P BSE Sensex rose by 4.9% in the month of November. S&P BSE Midcap Index & S&P BSE Small cap Index increased by 9.8% and 9.4% respectively. Mid & Small Caps continue to outperform the large cap indices. Equities across the globe rallied in November, as some of the concerns regarding inflation and spike in energy prices due to geopolitical tensions moderated. Consensus seems to be off the view that Fed rate hike cycle is largely behind, US bond yield also corrected as a result. These developments led to strong rally globally, S&P 500 was up 9.1%, tech heavy NASDAQ 100 was up 10.6% and MSCI Emerging Markets Index was up 8.0% in November.
Economic activity continues to track well in India; the recent GDP print was strong at 7.6%, (vs 6.2% yoy) causing consensus to upgrade their GDP forecast. This ties in well with what we are seeing in listed space as well, where consensus is upgrading their earnings estimates highlighting resiliency of earnings.
Festive demand across sectors has been mixed; with sectors such as auto especially 2W auto showing good improvement. Sectorally, Real Estate, Healthcare and Auto lead the broader indices rally whereas Banks/ FMCG were the key under-performers. Banks were under pressure post RBI’s move to increase the risk weights in certain retail focused unsecured segments. Broadly, management commentary in most of the domestically focused themes look constructive barring IT, where outlook continues to be weak. In terms of flows, post large outflow during October, FIIs turned buyers with inflow of USD 2.3bn in the month of November. DIIs were net buyers with $1.7bn inflows.
Quantum Long Term Equity Value Fund (QLTEVF) saw an increase of 7.3% in its NAV in the month of November 2023; Tier-I benchmark S&P BSE 500 TRI and Tier-II Benchmark S&P BSE 200 TRI increased by 7.0% and 6.7% respectively. Our portfolio stocks within Consumer Discretionary (Auto), utilities and IT did well; being underweight relatively expensive consumption sectors also helped. Some of the portfolio stocks within auto are seeing good traction during the festive period, and incremental expectation is of a sustained recovery. Financials were a key drag in our portfolio mainly due to increase in Risk weights across the unsecured space. Banks in our portfolio are well capitalised and the current move by regulator should not cause any immediate need for capital raise or meaningful slowdown in growth.
Impact of
increase in RWA (Risk-Weighted
Assets) on banks
RBI for some time has been flagging the high growth witnessed in specific segments of consumer credit, especially unsecured lending. The unsecured book across Banks, NBFC have growth at faster clip than overall Retail growth especially post covid. And in that context RBI has increased the risk-weights (+25%) on several categories of retail credit. Impacted segments are Personal Loans/Credit Cards/ as well as banks’ exposure to certain NBFCs. The possible impact on industry could be an increase in yield in the impacted categories to justify higher capital consumption and potential slowdown in growth. From portfolio perspective, Banks in the portfolio are well capitalised and there will be no immediate need for capital raise or any meaningful slowdown in growth.
So looking forward, Earnings growth remains resilient, quite in line our expectation of Indian economy being in a cyclical uptick after years (2015-20) of sluggish growth; this should be supportive of broad-based earnings recovery. Valuation barring certain expensive pockets look marginally higher than historical medians. With decadal high global interest rates, there has been general reset of valuation expectations; and in such an environment it is quite possible that some of these expensive pockets can correct. We broadly expect broader markets to track earnings growth.
Near term risks in our view are negative surprises
on inflation trajectory, global slowdown, lack of pickup in rural demand and
political uncertainty as the country heads into elections next year. To
conclude, our portfolio is well positioned to benefit from cyclical economic
upcycle over the medium term with major overweight 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 equities 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.
Source:
Bloomberg
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