ABC Portfolio - Feb '24 update

Investing in transformational trends core to India's transition from a low income to a middle income economy

Performance

Feb ’24 saw strength across global equity markets with China & Taiwan being the best performers. Most currencies, bonds and commodities were broadly flat while bitcoin rallied strongly to its Oct’21 peak. The Chinese government’s efforts to stabilize their markets, mainstreaming of Bitcoin via ETFs and a neutral stance on rate hikes created a benign environment for risk taking.

Indian equity markets diverged from the trends of 2023 with mid and small caps underperforming while the Nifty Next 50 was up strongly. Feb saw net sales by Foreign institutions (FPI) and buying by domestic institutions (DII). CY24 has seen ~52k cr (~6.2 bln$) of FPI sales matched by purchases by DIIs. Sector-wise returns reflected similar divergence like Jan’24 with PSUs, Auto and Realty being strong while staples and media were weak. The INR and Indian bonds were stable with a positive bias.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – We capture this via input providers like energy, materials & automation. Nuclear energy is important for energy transition as it is clean and highly efficient. An innovative PPP is being proposed where private players own the land, develop it and earn from power sales, while the state-owned nuclear firm (NPCIL) manages the reactors. Significant activity is underway to set up a semiconductor eco-system underway with plans for a foundry, assembly and testing plus chip design.

Organized agri-business – We capture this via the farm to fork supply chain, plantations & fertilizers. Efforts to establish a modern supply chain are underway with plans to set up large grain storage facilities that are linked digitally. Negotiations are on to source fertilizer raw materials from various countries. Sugar firms got the approval to supply potash from molasses.

Supporting infrastructure – We capture this via infrastructure, logistics and real estate. Three large initiatives are being planned by the Railways involving links to energy, mining and cement plants, connectivity to ports and more track capacity on high density routes. With the dedicated freight corridors, these initiatives should transform India’s freight logistics and transport.

National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors. Many projects in the oil & gas space are about to be launched across oil production, refinery and petrochemical facilities, gas pipelines and syngas production.

Digital platforms – We capture this via firms which use India’s digital public goods initiative as the foundation to offer products & services. The RBI has been running pilot projects on CBDCs, with latest tests on functionalities like programmability and offline transactions. These are components for building a digital economy with personalized fiscal and monetary policies.

Summary & Outlook

The current conditions appear to be supportive of equity markets despite the widespread concerns on valuations. The large underperformance of Chinese markets got reversed and this could help drive flows into EM & Asian funds. It is unknown at present whether the Bitcoin rally should be treated as “risk-on” signal as was the case historically, or reflects a structural change as ETFs can enable allocations to crypto as an asset class.

Within India, the political landscape continues to get more skewed in favour of the ruling BJP as we see switches from the opposition parties to join them. They came into a majority in the Rajya Sabha (Upper House), which coupled with a victory (as is being anticipated) in the Lok Sabha (Lower House), will make it easier to pass legislations.

The election campaign by the BJP has laid significant emphasis on economic growth with large core sector investments. This indicates the likely direction of post-elections policy making and is aligned with our portfolio themes.