ABC Portfolio - Jul'22 update

Performance & Portfolio updates - Jul'22

Performance

July ’22 saw a smart rally across equities, bonds, FX, commodities and crypto, with Indian markets mirroring the global trend. The Indian markets and INR have held up better than other EMs over this year. The rally was broad-based across sectors with FMCG & Banks playing lead roles post a 2 year hiatus.

Central banks continued to hike rates and the FED shifted from its policy of forward guidance to taking data denominated decisions going forward. The markets interpreted this as a signal that a recession is already underway and central banks would change the tightening stance shortly.

As inflationary pressures cooled, the Indian govt. removed tariffs on exports of refined products. Results season has been strong but y-o-y comparisons may not be realistic given the effects from the 2nd wave in Apr-Jun’21.

Developments in trends we invest into in the ABC Portfolio

1. Manufacturing ecosystem – Industrials were strong as commodity price inflation cooled while the policy push to promote manufacturing continues. Metals recovered off their lows but are sluggish as the demand outlook is uncertain over the next few months

2. Organized agri-business – As the monsoon picks up pace, the outlook for the sowing season is improving. At a policy level, considerable effort is on to set up more FPOs which can help demand to production linkages plus allow easier transmission of benefits to farmers.

3. Digital platforms – Pilot projects continue in the Account Aggregator framework and the ONDC platform - critical elements of a future digitized society. 5G auctions are also underway which will be a key enabler for connected devices and IOT down the road.

4.Supporting infrastructure – Firms involved in the infrastructure, capital goods and logistics continue to do well through the downturn as Govt. capex continues at the ground level and is reinforced at a policy level.

5.National Champions – As oil prices cool off, the pressure on marketing margins will ease but gas supplies could be an area of concern. Sticky inflation will likely force the push for transformation in this sector.

Summary & Outlook

While a rebound from oversold levels given negative sentiment was on the cards, it maybe a little early to announce victory on inflation and a pause in the tightening cycle especially in the West.

This inflation has a significant geopolitical element as the East weaponizes commodities and finished goods while the West weaponizes currency and rates. The path is unpredictable and sustainable demand destruction maybe needed to adjust to the geopolitically driven supply constraints.

As a result, we are using the rally to lighten positions especially in names which benefitted from lower inflation recently.