ABC Portfolio - Aug '23 update

Investing in transformational trends in India as it transitions from a low income to a middle income economy

Performance

Aug ’23 saw most asset classes in a corrective mode. Equities were weak globally, with Chinese indices being the worst. Barring oil which was up, other commodities were flat. Bond yields and US$ continued their move up.

Headline indices in India corrected in line with other global equity indices. However small and midcap indices were up in complete contrast. August saw the largest outflow from FPIs (Rs. 20625 cr i.e. 2.5 bln$) since Jan’23. Media, Consumer Durables and IT Services were the strongest sectors while Energy and Banking were the weakest. Indian bond yields were flat while the INR dipped to all time lows mid month before recovering some of the losses.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – We capture this via input providers like energy, materials & automation. Energy transition is a key focus for all energy and power companies while maintaining the traditional fuel business to support India’s energy needs. Towards year end, the government is planning auctions for mineral blocks critical for the energy transition.

Organized agri-business – We capture this via the farm to fork supply chain, plantations & fertilizers. Fertilizer subsidies are an increasing burden and efforts are on to promote balanced use of chemical and alternative fertilizers. Recurring volatility in vegetable prices around monsoon prompted the RBI to release a report on the need for major supply chain reforms.

Supporting infrastructure – We capture this via infrastructure, logistics and real estate companies. The PM Gati Shakti initiative was launched to enable a holistic approach across ministries for execution of infrastructure projects and is starting to bear fruit. Advanced transportation networks across roads, railways, ports and airports is a big focus and their building will boost current GDP plus enable a much larger scale economy.

National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors. All state owned oil & gas firms have articulated downstream and upstream integration plans to support economic growth and plan for usage shifts from energy transition. Global firms have a similar expansion strategy especially into petrochemicals.

Digital platforms – We capture this sector via digital platforms which can benefit from IndiaStack - a set of protocols for digital public goods (DPG) i.e. interoperable public architecture on which private parties can plug in and operate. The DPG payments network is being internationalized via a two part strategy. One is to build similar networks for low income countries to help in financial inclusion. The other to build payment rails to support remittances from the Indian diaspora or for Indian outbound tourists spending abroad.

Summary & Outlook

The divergence between asset classes seen in past months ended in August. The outflow by FPI’s was compensated by domestic institutional (DII) inflows. As DII’s reach critical size and drive Indian markets, it is possible the usual contra relationship between FPI and DII flows starts changing.

Our hypothesis was that with the removal of tax benefits on debt, insurance and real estate, correction in equity markets will likely be shallow as Indian investors buy the dips. This hypothesis has so far held true. Small and mid cap names find a lot of favor during periods of macro calmness.

The ABC Portfolio is an all cap strategy with a large cap bias. This allows us to benefit from different market conditions. We kept relatively high cash levels to be ready for potentially sharp currency induced volatility. The INR saw a new low in August and has been one of the weakest in the EM universe.