ABC Portfolio - Aug '22 update

Performance & Portfolio updates - Aug '22

Performance

The rally across asset classes which started in June, continued till mid-Aug, post which reversals were seen across assets. As the FED took a hawkish stance to reign in inflation expectations, the hopes of a policy pivot reduced leading to a rise in bond yields and falls in equities, oil and FX v/s USD.

The Indian equity, bond and currency markets have held up well relative to others. The equity rally broadened across sectors with the exception of IT services whose struggles may reflect chances of a US recession.

Developments in trends we invest into in the ABC Portfolio

1. Manufacturing ecosystem – Industrials have been the strongest to reflect the possibility of higher capex in the economy. Metals also recovered off their lows as news flow on stimuli from China emerged.

2. Organized agri-business – The govt. introduced the ‘one nation, one fertilizer’ policy requiring use of a single brand name for each fertilizer type and reflect the state’s role in providing a large subsidy to buyers.

3. Digital platforms – The Account Aggregator and ONDC platforms are ramping up activity with tech integrations and employee hiring underway. The telecom companies also detailed their 5G introduction plans

4.Supporting infrastructure – The allied areas of infrastructure building, logistics and real estate development continue to be strong as the Govt. push in these areas ensures activity.

5.National Champions – There is growing convergence in the future path of several state-run energy companies as they plan for the energy transition. This raises the possibility for future mergers to enhance vertical integration.

Summary & Outlook

The markets will need sometime to incorporate geopolitics as a long term factor shaping price action, as it has not been relevant for several decades. The current East v/s West conflict extends across economic, financial and military domains. The West has weaponized financial markets & policy while the East weaponizes raw material & finished goods supply chains.

A global recession is needed to reduce the level of demand in line with the new reality of supply shortages and has been indicated as much by the FED. As the USD is the global reserve currency, FED policy action effectively sets the policy environment for the entire over-financialized world. Consequently, this conflict also cannot end until the influence of Western policy no longer plays a determining role on Eastern economies and currencies.