ABC Portfolio - Jan '24 update

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

Performance

Jan ’24 saw wide variations across global equity markets with the US, EU and Japan being strong while China & Korea took large hits. Most currencies weakened against the USD, gold, bonds and bitcoin were flat while soft and hard commodities were slightly down. Negative news from China continued while the acceptance of a soft landing in the US is growing.

Indian equity markets also reflected this variance with the Nifty 50 being flat while the Next 50, mid cap and small caps rallied strongly. Jan saw net sales of 36k cr (~4.3 bln$) by Foreign institutions (FPI), partly matched by ~27k cr (~3.2 bln$) of purchases by domestic institutions (DII). Sector-wise returns saw a large divergence with PSUs, Energy and Realty were very strong while private banks, staples and media were weak. The INR and Indian bonds had a positive bias as the RBI again seemed to absorb foreign flows.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – We capture this via input providers like energy, materials & automation. The focus on energy transition initiatives continued with green hydrogen production, incentives for electrolysers, transmission projects and power sector reforms. The quest for secure access to critical minerals led to a deal for exploration in Argentina and plans for local mining incentives. MNC CEO’s attending state investment conferences discussed their vision for manufacturing in India.

Organized agri-business – We capture this via the farm to fork supply chain, plantations & fertilizers. The government is working on policies to improve agri productivity and promote sustainable farm practices under its Vision 2047 development plans. This includes promoting organic products, reducing chemical usage, diversifying crops and saving water, nutrients and energy.

Supporting infrastructure – We capture this via infrastructure, logistics and real estate. The Vision 2047 also focuses on India’s urban transformation as the population in cities rises from 31% in 2011 to 40% by 2036. Development financing , urban transportation, healthcare & skill development and waste water recycling are critical components of this transformation.

National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors. Production from domestic oil and gas wells, expansion of refining & petrochemical capacities, and building gas pipelines are key investment areas for the state owned firms.

Digital platforms – We capture this via firms which use India’s digital public goods initiative as the foundation to offer products & services. Building data centers is a focus for both Indian and MNC firms. Major consolidation in the OTT media industry is underway in India to tap the world’s largest user base.

Summary & Outlook

The divergence between Developed and Emerging market equities was a departure from the coordinated rallies seen in the previous quarter. This builds on our observation at the end of 2023 that market conditions and sentiment seem completely opposite to the end of 2022.

The shift in the macro regime based on the rise of multipolarity, conflicts and supply chain reset, means that government intervention in deciding capital allocation will likely be a feature globally. (wartime economics). The sectoral trends in January in Indian markets seem to suggest that shifts in allocation away from the popular sectors of the previous regime e.g. banks and consumer towards the drivers of this regime i.e. energy, industrials, infrastructure, real estate and metals seems to be underway.

We completed 3 years for the ABC Portfolio in January. The divergence in returns seen between various global equity markets as well as the sectors in Indian equity markets, is reflective of the variations seen in the last 3 years. It was bookended by two bull phases at both ends and an 18 month flat period with volatile swings in either direction in between.

This variation in market conditions is useful to test the quality of a portfolio strategy. Our note titled “ABC Portfolio completes 3 years” goes deeper into this, starting with our initial thesis, how we delivered on that, and what lies ahead!