Equity market commentary
While other emerging markets were falling, India continued to outperform in the recent times. Its weight in the MSCI Emerging Market Index moved from 8% to 12%. In fact, we have witnessed profit booking from some foreign portfolio investors (FPIs).
Looking at various high-frequency indicators, 19 out of 22 indicators are now showing positive momentum. It’s fair to say that overall, the economy has picked up momentum and we are seeing a V-shaped recovery in many segments and a K shaped recovery in a few segments.
“We continue to have a view of marginal under-weight on small and mid-caps because of their valuation and marginal over-weight on large caps. It’s time to be neutral to equity as an asset, as it is fairly priced,” said the fund house.
The fund house added, “One positive thing happening is India’s commitment at COP 26 climate summit that says by 2070, India will be net-zero in carbon emissions. This is likely to help us get much better marks on the ESG aspect as compared to our peers such as China & Russia.”
The fund house has shortlisted six themes for the next decade
- Big becoming bigger and strong becoming stronger - For instance, a decade ago, there were dozen-plus telecom operators, however, now there are four. The fund house sees consolidation across industries such as banks, steel, cement, NBFC and aviation
- Revival of the investment cycle - In the cement, steel and sugar industry, the capex cycle has started. Capital goods companies will do well in the years to come as their operating leverage comes into play with higher volumes
- Exports - Multi decade growth, which we saw in the IT and generic pharma sector, is likely to repeated across many sectors supported by PLI schemes like electricals, electronics, textiles, bulk drugs, mobile handsets, chemicals, automobiles and auto components etc.
- Real estate & home improvement - Real estate and home improvement sector will benefit from both primary and secondary market demand
- Digitisation - Companies that expand market, improve productivity or reduce cost through digitization will be the winners
- Financialisation - Companies engaged in providing financial solutions from sectors like banks, fin techs, insurance, MFs, and NBFC will create huge value in the coming years
Key risks
The fund house believes Omicron is the most important concern for the markets. Fortunately, all the data received so far shows that this is a mild variant and hopefully this will not result in disruption and our battle continues to remain with the Delta variant. The second worry is related to inflation, which is believed to remain elevated over the next two to three quarters. It will not go out of control and the fear of inflation may create a temporary fall or correction in the market but not permanent. Further, FPIs are sellers in the Indian market. This is primarily driven by ‘long China short India’ call because we have outperformed China by a big margin.
Debt market commentary
Yield curve of India is discounting at least 2-3 rate hikes and continues to remain one of the steepest in the whole of Asia. Overall, on the fixed income market side, markets are believed to be range-bound. The market has already discounted 2-3 repo rate hikes in the year to come. So, to a great extent, the market is running ahead of RBI in policy action format.
The fund house recommends staying invested across fixed income strategies that are in line with investment horizon and risk appetite.
Investors with a long-term horizon can look to invest in the gilt and dynamic bond funds space. Investors looking for relatively higher yield-to-maturity (YTM) can consider bond, floating rate, medium-term fund categories.
