ABC Portfolio - Feb '23 update

Performance & Portfolio updates - Feb '23

Performance

Feb’23 was a mixed bag in global equities with China, Brazil, S&P500 & India correcting while Europe, Japan, Taiwan & Nasdaq going up. USD appreciated against most currencies as bond yields rose sharply as hopes of a FED pivot receded in light of strong employment and inflation data.

Indian markets are the weakest this year but relative underperformance is reducing as global worries re-emerged. Indian bond and FX markets were also relatively stable. PSU banks, metals and energy were the weakest sectors reversing 2022 gains, while consumer staples & IT were the strongest.

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 underway with large scale solar projects and green hydrogen pilots. The discovery of Lithium deposits in J&K maybe significant but verification of actual reserves and timelines for mining and refining are critical. Automation companies are preparing for industrial 5G roll-outs for digitized manufacturing.

Organized agri-business – We capture this via the farm to fork supply chain, plantations & fertilizers. Incentives are being given to set up food processing facilities which will help organize upstream activities over time. Reducing our subsidy burden and diversifying raw material sourcing are key issues being looked into in the fertilizer sector.

Supporting infrastructure – We capture this via infrastructure, logistics and real estate companies. The budget re-iterated the focus on all of these areas as these are essential for mass job creation. Order flows for infra projects are strong across rail, roads and metros leading to allied interest in real estate.

National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors. Oil marketing companies made further profit recoveries as oil prices stayed stable. Adani’s troubles acted as a catalyst for a correction in the PSU banking sector.

Digital platforms – We capture this sector via digital platforms which can benefit from the implementation of IndiaStack. The second phase of this roll-out is underway involving digital market places (ONDC), data aggregation (AA) and lending (OCEN). India is using its chair position in the G20 to promote its digital prowess and open payment links with nations like Singapore and UAE.

Summary & Outlook

We continued our relatively cautious stance as the level of bond yields today offer alternatives to the global and domestic investor. Stronger global equity markets have also given other options and reduced interest in India. Stronger USD can also exert pressure on asset prices globally.

We created some cash plus several portfolio companies also paid dividends thereby increasing our overall cash holdings. Select names have corrected and we have been recycling into those. Our investment focus stays on the above themes critical for India’s transition from a low income to a middle income nation in the coming decade.