ABC Portfolio - Dec '22 update

Performance & Portfolio updates - Dec '22

Performance

Dec’22 saw a correction across most equity markets except China. The USD also continued to weaken against most major currencies. The bond markets also reversed some of the gains seen post Oct. Trading activity in Dec often reflects a closing out of book by market participants, which can lead to a reversal of some of the trends seen in the preceding months.

The Indian markets reflected this year end effect with weakness in equities and the INR post a year of outperformance. The relative strength of other Asian equities and currencies likely also reflects a rebalancing away from India in favor of China and beneficiaries of Chinese reopening. PSU banks and metals were the standout sectors in Dec while the rest saw weakness.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – Significant news flow was seen across the energy transition eco-system with RE generation, storage tech, carbon credits. The parliament passed a bill to mandate use of RE by industries & large residential buildings and reducing carbon intensity. The global energy transition is the tailwind for India’s move towards energy security.

Organized agri-business – Solving for our fertilizer requirements is a key focus area as highlighted by the PM in the G20 inaugural address. Efforts are underway to secure long term raw material supply from North Africa. Long shuttered state-owned fertilizer plants with ~20% of current urea capacity are being re-started. Organic and nano fertilizer usage is also being pushed.

Supporting infrastructure – Increased activity in railways is on with building of rail lines for coal transport and the DFC, orders for locomotives, wagons and coaches, plans for high speed rail links and metro building across cities. The 2023 budget will likely see a continued push for infrastructure building

National Champions – The divestment process for IDBI is underway, and its success may set the path for more PSU bank privatizations.

Digital platforms – Foreign trade settlements with Russia in rupees was started and efforts are on to engage more emerging market countries in similar deals. Cross border trade settlements will be a big use case for CBDCs, which in turn is the key link for a digitized economy of the future.

Summary & Outlook

Post large drawdowns, the typical reaction is to buy the popular stocks / sectors / markets. This can result in strong periodic bounces before supply emerges from shareholders stuck at higher levels. These popular sectors of the past can see a prolonged weakening of fundamentals if the macro regime shifts. The combination of unfavorable macros and a supply overhang can lead to long term underperformance.

Our outperformance in 2022 is indicative of a macro regime shift being underway. In the ABC Portfolio, we align ourselves with transformational macro trends relevant to India but having global tailwinds, while staying away from previously popular areas which can face headwinds.