ABC Equity Portfolio - Sep '24 update
Investing in transformational trends core to India's transition from a low income to a middle income economy
Performance
Sep’24 was a mixed bag across global markets with China being the absolute stopper as both H-share and A-share markets soared post the rate cuts and equity buying policy decisions. Amongst other markets US & India were strong while Korea and Brazil were weak.
Most currencies rallied against the USD going into the FED meeting in mid-month and then retraced. The commodity complex (Gold, Metals, Agri) and Bitcoin rallied through the month while Oil was flat. Bonds rallied into the FED rate cut and then corrected.
Indian equity markets participated in the global equity rally with Large caps again outperforming Small & Mid Caps. Foreign institutions (FPI) were buyers of INR 12.6k cr (~1.5 bln$) while further purchases of INR 30.9k cr (~3.7 bln$) were made by domestic institutions (DII). At a sector level, Metals, Consumer and Realty were strongest while and IT Services and Govt. owned enterprises lagged. Indian bonds moved in tandem with global bonds while INR retraced the gains it made before the FED meeting.
Developments in trends we invest into in the ABC Portfolio
Manufacturing ecosystem – We capture this via input providers like energy, materials & automation. The National Electricity Plan estimated that power generation, transmission and peak demand would approximately double from by 2032 and the capex required in all those areas to scale up. This offers some visibility on the order books of equipment providers and the growth of asset owners. Multiple options are being worked on to secure the critical mineral supply chain including mining asset deals and being part of a US led alliance.
Organized agri-business – We capture this via the farm to fork supply chain & fertilizers. A draft Agri policy was released in Punjab with proposals including banning paddy farming in dry areas and using alternative systems like micro-irrigation, using canal water, solar powered pumps and alternative crops like cotton, maize, sugarcane & vegetables. Proposals include farmer’s finance & healthcare, organic farming and legally guaranteed purchase price for crops. As Punjab is a key state from an agri policy perspective, the outcome of this draft will be keenly watched for the future direction of Indian agriculture.
Supporting infrastructure – We capture this via infrastructure, logistics and real estate. The focus is on creating large scale industrial infrastructure to attract investments in manufacturing with a plug & play set-up. Co-locating the sector value chain in an industrial city can also save on logistics costs. Urbanization and real estate development is an off-shoot of this activity.
National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors, plus developing the life insurance sector. Banks are struggling to attract deposits and hence will be evaluating other options for fund raising as well. State owned banks have announced plans to raise ~ 30k cr (~3.6 bln$) via stock sales. Geopolitical issues in the Middle East have created some uncertainty for oil & gas firms due to the unknown trajectory of crude oil prices.
Digital platforms – We capture this via firms which use India’s digital public goods initiative as the foundation to offer products & services. The RBI will introduce the Unified Lending Interface (ULI) as the 3rd part of the financial technology stack comprising digital accounts, digital payments and digital lending. The objective of ULI is to simply credit appraisal and disbursement especially to smaller / rural borrowers and expand the financial ecosystem.
Summary & Outlook
The FED meeting was the focal point going into September and it delivered on the 50 bps cut being expected by the market. The bazooka came from China with Mario Draghi-like “whatever it takes” approach, which likely set off a furious short covering bout and spiked interest in Chinese equities.
This presents some issues for the Indian markets in the near to medium term as a combination of high domestic investor interest in equities & derivatives, headline valuation disparity with China, some policy stasis with ongoing state elections, plus geopolitical trouble leave less margin for safety.
Tax incentives have skewed allocations of domestic investors to equities over other financial assets. We have also seen extreme interest in options trading which has prompted authorities to cool down that space.
We are at the phase in India’s low to middle income economic transition where execution on mass job creation in manufacturing, agriculture and infrastructure becomes important, as the total market cap of Indian equities already prices in GDP growth for the next 2-3 years.
Long term themes will always have periodic corrective phases causing pain. We had an 18 month corrective phase from Oct'21 to Mar'23 followed by an 18 month period of higher returns and large equity participation. As long as the overall direction of the country's progress is on track, India's natural advantages of growth over a low base (per capital income) along with incentives to allocate to equities will help drive returns.