Foundations of an Opportunity: Building resilient wealth in dynamic markets

Dear Investor,

As we emerge from a period of celebration in the markets, the journey ahead calls for both optimism and prudence. India’s recent economic performance, 8.2% GDP growth alongside record-low inflation of 0.3%, has undoubtedly energised sentiment and pushed markets to fresh highs. Your portfolios have participated meaningfully in this rally, reflecting the strength of the underlying fundamentals we have positioned you toward.

Yet, as we step back, market history offers a valuable lesson: sustained rallies, even those supported by strong data, eventually encounter phases of recalibration. This isn’t pessimism, it is the wisdom of cycles, which tend to reward the prepared and penalize the complacent.

Valuations in certain segments have stretched beyond comfort zones, while select indicators, moderating consumption trends, uneven demand across sectors, and a widening trade deficit, suggest that the landscape ahead may require more nuance. This is not a call to abandon conviction but an invitation to refine it. The outlook remains constructive, but the path forward rewards those who combine optimism with prudence, celebration with caution, and conviction with strategic flexibility.

Macroeconomic Foundations: Strong but Nuanced

1. Growth Momentum: Exceptional at the Surface, Mixed Beneath: India posted 8.2% GDP growth, the fastest pace in six quarters. Manufacturing rose 9.1%, services 9.2%, and corporate earnings exceeded expectations. Credit flow remains healthy at 11.3%, reflecting confidence and financial stability.

Yet some signals hint at cooling beneath the surface:

• Petroleum consumption grew just 2.4%, pointing to softer industrial and consumer demand.

• The trade deficit widened to $37.8 billion, indicating pressure from external balances.

• Growth may moderate organically after a period of exceptional acceleration.

Investment Takeaway: The growth story is intact, but maturing. Investors should favor sectors benefiting from structural demand, such as infrastructure and domestic consumption—while avoiding overextended pockets of the market.

2. Inflation & Interest Rates: Inflation at 0.3%, the lowest on record, creates a uniquely favorable environment for savers and fixed-income investors. With 10-year government yields at 6.52%, real yields are meaningfully positive, offering both stability and return.

This environment supports:

• Strong debt market performance

• Lower borrowing costs

• Improved balance sheet health

However, inflation at these levels is unlikely to persist. Seasonal and transitory factors are at play, and we expect a reversion toward 3-4% over coming months.

Portfolio Implication:Stable inflation supports steady consumption and enhances debt returns. But rate-sensitive sectors must be approached with realism, not exuberance.

3. Corporate Earnings & Structural Drivers: Corporate profitability has strengthened, with portfolio companies delivering 10.6% sales growth last quarter. Infrastructure-linked sectors remain robust—steel production up 14.8%, cement up 7.3%.

However:

• Tech valuations appear priced for perfection

• Not all demand indicators point upward

• A correction in isolated pockets should not be ruled out

Bottom Line: Earnings growth is broad-based enough to support markets, but not indiscriminate enough to justify buying anything at any price.

Equity Markets: Strength Supported by Fundamentals, But Not Without Excess

Quality Over Momentum

Your equity allocation is deliberately positioned toward companies with:

• Reasonable valuations

• Clean balance sheets

• Demonstrable earnings delivery

• Exposure to long-term domestic growth themes

We are participating selectively in IPOs where fundamentals justify valuations, while avoiding the temptation to chase frothier segments of the market.

What We Are Watching

Some sectors—particularly high-growth tech and consumer discretionary—may require a valuation reset. Our approach is to trim strength selectively and add quality on weakness, avoiding extremes in either direction.

Debt Markets: Stability, Income, and Strategic Optionality

Your debt allocation continues to play a crucial role in the portfolio, especially in an environment where:

• Real yields are positive

• Credit markets are healthy

• Borrowing costs have eased

• The yield curve is steepening

We are positioned toward:

• High-quality corporate bonds with superior yields

• Short-to-medium duration exposure to reduce interest rate risk

• Diversification across issuers for stability

Why This Matters: If equities correct, debt acts as your anchor. If inflation stays subdued, debt provides attractive, real returns.

Three Actions We Are Taking Right Now

1. Harvesting Gains Selectively: Where valuations no longer reflect fundamentals, we are booking profits, not exiting, but consolidating advantage.

2. Adding Quality on Weakness: Temporary dips in strong businesses are opportunities, not risks. We are leaning into those opportunities.

3. Preserving Your Strategic Debt Allocation: Debt is not deadweight, it is strategic capital that maintains stability, generates income, and enables opportunistic rebalancing.

What to Expect Next Quarter

We evaluate the environment using scenario-based thinking:

1. Scenario 1: Goldilocks Continues (40%): Growth stays strong, inflation moderates, markets grind upward.

2. Scenario 2: Growth Normalizes, Markets Consolidate (35%): Valuations cool, markets digest gains. A constructive environment for disciplined investors.

3. Scenario 3: External Shock (25%): Global tensions or Fed shifts cause volatility. Debt provides downside protection and re-entry opportunities.

Your portfolio is intentionally positioned to participate in Scenarios 1 and 2 while remaining resilient in Scenario 3.

Final Thoughts: Discipline Over Drama

Your wealth is not built by reacting to every twist in the market narrative. It is built by:

• Staying invested

• Staying diversified

• Staying disciplined

• Avoiding emotional decisions

• Focusing on long-term compounding

India’s macro story is strong, your portfolio is well-positioned, and our focus remains on managing risk while capturing opportunity. As Chanakya said: “As soon as the fear approaches near, attack and destroy it.”We don’t fear volatility, we prepare for it and use it to your advantage. Thank you for your continued trust. If you'd like to discuss the positioning of your individual portfolio in more detail, we are here to guide you.

Warm regards,

Team Cambridge Wealth