Investment Market outlook - September 2023
Our economy has continued to grow at a reasonable pace, becoming the 5th largest economy in the world and contributing around 15% to global growth. We have also made significant progress towards controlling inflation. Our banks remain healthiest in more than a decade with historically high levels of capital, declining levels of non-performing assets, and rising profitability.
Corporate balance sheets are robust, with lower leverage, improving debt servicing capacity and strong profitability. A lower current account deficit and ample capital flows have imparted strength to our external sector. The resultant accretion to forex reserves has provided a buffer against external shocks. Overall, India’s strong macroeconomic fundamentals have laid the foundations for sustainable growth
Compared to a year ago, the fixed-income market has witnessed a slight increase in demand for bonds, primarily due to the stability in central interest rates. This presents an opportunity to lock in interest rates for a longer term and take advantage of the current rate environment.
While markets have delivered decent returns over the last quarter, this may not continue for too long and you may want to brace yourself for a period of high volatility with the run up to the elections in 2024. But don’t worry, at CW we’ve already taken steps on managing risk in your portfolio and will be keeping close eye across portfolios to ensure we get through these turbulent times safely as always!
The manufacturing sector registered a moderation, primarily due to a decline in output, longer delivery times from suppliers, & decreased stock of purchases.
Despite these factors, the overall index is situated within the expansionary range, suggesting continued growth in the sector. Meanwhile, in India, the PMI for services experienced its strongest rise in more than 13Yrs, driven by strong demand & the acquisition of new business.
In the first quarter of FY 2023-24, the amount of money borrowed by Indian companies from foreign sources increased by5X compared to the previous year.
The demand for investment was high, especially in areas like infrastructure & services, which has friven India Inc’s demand for external borrowing. The total amount of foreign money coming into India as loans was $14.5B, which was much more than the $4.0 billion that came in during Q1 FY22-23
For Q1 FY23-24, Nifty showcased a notable growth of 32% in their earnings. This surge followed a robust earnings CAGR of 23% spanning the fiscal years 2020 to 2023.
The expansion of profit margins across various sectors during Q1FY24 was aided by the ease in input costs. Notably, the major contributors to net profit growth were companies in the financial and oil & gas sectors, whereas the IT sector's performance was relatively flat.
During July’23, foreign portfolio investors (FPIs) continued their trend of being net buyers for the 5th successive month, accumulating investments worth US$ 4.3B.
Analyzing FPI investments based on countries, Indian equities maintained their allure compared to peers in other emerging markets. Notably, FPIs directed a total of US$ 0.7 Billion into the domestic markets throughout August 2023 (up to the 11th of the month).
Headline inflation, in the all-India consumer price index (CPI), surged to 7.4% in July 2023 from 4.9% in June’23.
While the food inflation shock may reverse quickly, it's important to keep a close watch on El Niño weather conditions along with global food prices which need to be watched closely against the backdrop of a skewed south-west monsoon. So forth the RBI has decided to maintain the policy repo rate at 6.50%.
Their focus continues to be on gradually reducing the supportive measures to bring inflation in line with the desired target, all the while providing support for economic growth.
To sum up, there is hardly any liquidity premium left for allocating to fixed income instruments. Investors could look at a combination of conservative hybrid strategies that would increase the return profile for a similar risk profile.
Path of the Intelligent investor
The Nifty price-to-earnings ratio is currently at 22X, lower than its historical average of 25X indicating that the current valuations are reasonably priced to their earnings.
Private sector investments surged to an all-time high of Rs. 10.5L Cr, signifying a substantial growth in capital formation. This aligns with the govt's emphasis on capex, as a result, it is ideal to increase allocation to high-quality growth equities over the next 12-24 months.
Although it is important to note that the next 12 months could be volatile with the run up to the 2024 elections as indicated by historical data. Proceed cautiously especially when considering allocations to equity options
There could still be some merit in opting for Medium Duration and Credit Accrual strategies. with focus on bonds with ratings of AA and AAA.
Alternative options could be Debt-oriented hybrid funds which combine equity & fixed-income instruments to aim for slightly better returns with a similar conservative risk profile.
We follow a 48-point quantitative research process, and that works well on three counts:
Analysis of the fund house quality, strategy of the portfolio and the fund manager performance, according to which allocations are suggested and options around rebalancing, taking into account market conditions and our research insights are suggested
In addition to the quantitative process, the Investment Committee discusses specific investment choices considering an 18 point behavioural profile of each investor, industry cycles and funds in view
Our research outlook is based on fundamentals, historical performance and consistency of performance. We coordinate with the fund managers to understand their strategies and approach, adding to the maturity of investment decisions
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