Dear Investors & Partners,
Equity market performance in July'24
The Nifty-50 index was up 3.9% MOM in Jul-24, while also scaling a fresh peak of ~25,000, before ending the month at 24,951. Nifty Small cap 100 and Nifty Mid Cap 100 indices were up by 6% & 5% respectively. Small cap and Mid caps outperformed large caps by 0.6%/1.9% in Jul'24. There was mixed trend among the sectors, with Technology (+13%), Healthcare (+10%), Media (+8%), Utilities (+6%) and Consumer durables (+4%), being the top gainers, whereas Metals (-2%), Private Banks (-1%), and Real Estate (-1%) were laggards MOM.
India's contribution to the worlds market capitalisation was at the highest at 4.4% (as compared to a low of 1.6% and average of 2.7% in the past 15 years). As far as valuations are concerned, India's valuation premium to MSCI EM is trading above its historical averages. The Mid cap 100 index is trading above +1 Std Deviation and its valuation premium over Nifty-50 has increased in the last 12 months.
Past performance may or may not be sustained in future and is not a guarantee of any future returns, and should not be used as a basis of comparison
with other investments. Index performance does not signify scheme returns
Strong institutional flows:
Foreign Institutional Investor (FII) turned buyers for the second consecutive month of USD3.3b in Jul'24. Domestic Institutional Investor (DII) inflows were healthy at USD2.8b in Jul'24. FII inflows into Indian equities stand at USD3.7b in CY24YTD vs. inflows of USD21.4b in CY23. DII inflows into equities in CY24YTD continue to be strong at USD31.3b vs. USD22.3b in Cy23.
Global environment continues to be mixed:
US equity indices registered mixed performance in July-24 with S&P gaining 0.9% while the tech-heavy NASDAQ lost 1.6%. Faster than expected US economic growth amid decent growth in business investment coupled with Fed's rate cut expectation supported the markets. Globally, Indian markets were among the best-performing markets, along with US Dow Jones (+4.4%) and Australia (+4.2%). Hang Seng and Shanghai Composite declined 2.1% and 1% amid the weakness in the economy. Geo-political risks in the Middle East after flaring up in Apr'24 have remained at an elevated level, though the respite on oil price front is maintained.
The gradual weakening of the US economy, especially in the labour markets, with the consistently soft inflation prints, has sharply increased the probability of the US Fed cutting rates. A cut in US rates may see higher Emerging Market (EM) and India inflows. However, the recovery trajectory in the export-oriented Indian sectors will depend on the growth trajectory of the US economy.
Rainfall:
For the season till 31 July, rainfall was 2% above normal at 453.8mm. Progress though was uneven with Central and South receiving excess rainfall and North West and East India receiving deficient rains.
Overall reservoir storage was 51% of capacity (up from 39% in just one week). Mixed bag as compared with the past: it was 55% of capacity last year, but better than 10 year average of 48%. West and South were considerably ahead of the averages, Central was on par, and North and East were lower both as compared to last year and the 10 year average.
Growth trends:
Business indicators indicate strong domestic activity:
- GROWTH: Rail freight registered 10% Year on Year (YOY) growth vs. 4% in the previous month and Port volume growth higher at 7% YOY vs. 4% in the last month. Air traffic growth improved to 6% YOY vs. 4% in the last month while Fuel consumption growth improved to 3% yoy vs. 0.2% in the last month. Cement production rose by 4% Month on Month (MOM).
- STABLE/SOFT: Electricity production growth eased to 8% YOY vs. 14% in the previous month. Auto sales dipped by -1% MOM vs. -6% contraction in the previous month. Steel production contracted by -4% MOM.
- Trade deficit: Deficit contracted by -6% mom with -11%/-9% lower exports/imports. Exports/imports registered 3%/5% YOY growth.
- Forex: Reserves remained stable at record high of US$ 652BN.
- Currency: Rupee saw 8 paise depreciation mom. Global currencies: Euro and Chinese Yuan (CNY) were stable while YEN continued to depreciate.
- Capital flows: Capital flows likely to pick-up supported by strong Foreign Institutional Investor (FII) inflows.
India is currently enjoying the confluence of the macro and micro tailwinds with ~7% (GDP) Gross domestic product growth, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings. The Nifty Midcap 100 index and the Small Cap index are trading at a 12-month forward P/E ratio which is at a premium to their long-term average. Nevertheless, markets remained in their optimistic mode, as they shrugged off weak earnings while rewarding even modest beats in the 1QFY25 earnings season. Versus expectations, though, negative surprises were few, concentrated in discretionary. Industrials, metals, and durables had higher sales and EBITDA than estimated. Indian markets ended the month at a new high level, gaining 4% amid volatile sessions ahead of the Union Budget.
The FY2025 Union Budget delivered a prudent balance between capital expenditure, fiscal prudence and welfarism. The budget did minor tinkering on tax rates for individuals, while capital gains taxes were rationalized across asset classes.
While valuations are elevated, this is a function of:
- Better quality of growth: While RoEs may peak at much lower levels compared with the 2000s cycle, balance sheets and free cashflows of corporates are better with a focus on capital allocation. However, that does not imply that high valuations are sustainable.
- India's growth and balance sheet differential to Emerging Markets (EMs): Post-covid, Indian corporate earnings have been better than Ems, with a better deleveraged balance sheet.
- Strong domestic flows: This however is a feature of most bull markets, though the quatum may vary.
We continue to believe that the investment environment going forward would be a “stock picker's market” and would separate the men from the boys. There could be instances where companies operating in the same sector may end up reporting diverse set of financial results. Our approach in such an environment would be the same as we have been following over the last few quarters. It would revolve around the thesis to identify companies basis the “bottom up” approach.
Our Risk Management Framework & our Investment Framework are well thought-out and institutionalised to generate superior investment performance and creating a smooth investment experience for all our investors. They are framed based on our own investment experience and also imbibed learnings from some of the great investment houses and investment managers globally, which will stand the test of time and keep our investors interest at high standards. We have put risk limits based on fund mandates, market cap segments, sectors and stocks.
How are we positioned in our funds?
With macro situation being very dynamic and volatility increasing across asset classes, we continue with our strategy of running well-diversified portfolios. We are more focused on stock selection process within the sector rather than trying to take large overweight / underweight position among sectors. We would also refrain from taking aggressive cash calls.
What should be your approach while investing into our Mutual Fund Schemes?
We expect the volatility witnessed in the month of YTD CY24 to continue over the next few months as the market-outlook is likely to remain challenging. Valuations remain marginally above long-term averages. On the back of stable commodity prices especially crude oil and with operating leverage, earnings would rise for corporates and rupee denominated trade could lead to a strong performance by the Indian economy in CY24.
Investors wanting to invest in lumpsum should invest in ITI Balanced Advantage Fund, Value Fund and ITI ELSS Tax Saver Fund (formerly known as ITI Long Term Equity Fund). Investment in equity funds, particularly mid and small cap categories, should be done systematically over the next three to four months in the form of daily / weekly STPs or SIPs. While the current rally shows little signs of slowing down, retail investors must continue investing in well-managed funds via SIPs.