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The continued global uncertainties have made it difficult to decode the market and identify existing opportunities. In this context, Vihang Naik, Fund Manager, L&T Mutual Fund addresses key concerns of investors and talks about opportunities that equity market holds. You can watch the video by clicking here.
Here are some key highlights from his talk:
The global macro situation
The ongoing Russia-Ukraine geopolitical crisis has affected global macro that had otherwise started improving post covid induced lockdowns.
While Russia has a low single-digit contribution to world GDP and market cap, its contribution to energy supplies to Europe is quite high. It supplies about 39% of Europe’s natural gas. On a global basis, around 12% of crude and 16% of the world’s natural gas come from Russia. Further, ongoing disruptions are hurting energy prices and are creating a cascading effect on global inflation.
Talking about China, for a large part of the last year, its activities were weighed down by factors like zero covid cases policy, focus on reducing corporate leverage and decarbonisation initiatives. The Chinese credit impulse that peaked in October 2020, appears to have bottomed out in November 2021 but it is inching up since then. This should augur well for global commodities demand like steel.
On the US front, it is important to observe the yield curve. The US two-year to ten-year yield curve has started to invert. As the yield curve gets inverted and global economic growth revises downwards, the rate hike cycle might be short-lived.
Opportunities and challenges in domestic market
Last year, energy and global food inflation were high. But two consecutive good monsoons kept India insulated. CPI (Consumer Price Index) was also low as low food inflation had offset high non-food inflation. However, due to rising input prices and the global geopolitical situation, food inflation has started to rise. Hence, CPI has increased from 6.1% in February 2022 to 6.95% in March 2022.
In line with inflation expectations, bond yield has increased from 6.8% to 7.2% and will dampen the sentiments in the short term.
Also, over the last six months, companies spoke about rural economy slowing down, as can be seen in persistently high MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act 2005) accounts. The average demand for MGNREGA is currently 22.6 million households as against 17.9 million in the six months immediately preceding covid.
However, the rural economy continues to hold promise as the Bloomberg agricultural spot index is up 25% year-to-date. Local Indian prices have moved up noticeably. Both rice and wheat prices are about three-year high and futures are up by 11% and 42%, respectively. They account for 40% of the total agricultural output in value terms. Besides, IMD (India Meteorological Department) expects a normal monsoon which will give rural income a meaningful boost.
This should augur well for the rural economy and sectors like staples, consumer discretionary, and building products.
Positioning in the current environment
We are currently underweight on exporters like software and chemicals and the banking sector. However, we are positive about rural-focused NBFCs, domestic pharma, auto and cement industries.
We believe that L&T Flexicap Fund, which follows a diversified strategy is positioned for the challenging global macro. As on March 2022, the top 10 and 20 stocks account for about 35% and 50% of the AUM respectively. The fund invests around two-thirds of its funds in large-cap stock and the balance in quality small and mid-cap segments.
