ABC Portfolio - May '23 update

Investing in transformational trends in India as it transitions from a low income to a middle income economy

Performance

May ’23 was a mixed bag across global markets with diverging fortunes. Equity markets strengthened as a a deal to raise the US debt ceiling was struck mid month. The Nasdaq, Brazil and Taiwan surged while China and UK were in the red. On the other hand, fears of large treasury bond issuances caused bond yields and the US$ to move up signaling tighter liquidity conditions. The narrative on de-dollarization also continued with Saudi Arabia indicating its desire to join the BRICS.

Indian equity were buoyant with small and midcaps outperforming large caps as net buying by foreign investors (FPIs) surged to ~INR 28000 cr (~3.4 bln$) in May. This was in complete contrast to Jan - Feb when FPIs sold ~ INR 55000 cr (~7.5 bln$) and stocks were cratering. FMCG, Auto and Realty were the strongest sectors while PSU banks were the weakest. Indian bond yields were stable but the INR weakened in May.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – We capture this via input providers like energy, materials & automation. News flow around the energy transition continued with initiatives on manufacturing of electrolysers and lithium ion batteries being announced. The power ministry announced its roadmap for the electricity sector to balance near term needs via increased electricity trading, shorter power purchase agreements, carbon credits and thermal plants along with longer term energy transition goals.

Organized agri-business – We capture this via the farm to fork supply chain, plantations & fertilizers. The biomass co-firing policy was introduced for use of biomass pellets in thermal power plants. This will help rural incomes while reducing carbon emissions. A comprehensive policy and regulatory framework is needed to operationalize this.

Supporting infrastructure – We capture this via infrastructure, logistics and real estate companies. Government spending across infrastructure segments especially highways and railways has driven domestic activity. The Middle East is another big source of projects as those nations prepare for a post-oil world. Real estate firms are in a sweet spot as infrastructure building spurs supply creation to match the demand increase from likely peaking in interest rates and low post tax yields on debt investments.

National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors. Downstream plans for oil & gas majors involve a massive expansion into petrochemicals. The petroleum ministry is considering bringing the chemicals and petrochemicals department under it to better coordinate this shift. On the upstream side as well, attempts are on to buy oil field stakes in multiple countries and expand domestic exploration activity.

Digital platforms – We capture this sector via digital platforms which can benefit from the implementation of IndiaStack. The architecture of this technology stack uses the concept of digital public goods i.e. an interoperable public utility on which multiple private parties can plug in and operate, to prevent digital colonization. Two major initiatives currently underway are the Account Aggregator (AA) framework and Open Network for Digital Commerce (ONDC). AA will enable credit appraisal and access to formal capital, while ONDC will reduce platform monopolies to spur local commerce.

Summary & Outlook

We had scaled up equity allocations in the portfolio in late March and April. The pendulum has swung from apathy and oversold markets in Feb-Mar to broad-based participation and vertical up-moves in many stocks in May.

- Global conditions seem benign with the debt ceiling debate settled and efforts on to thaw the US-China tensions as US business leaders visit China.

- In India, equities are benefitting from the lack of post tax yields on other investment choices and the commentary on economic buoyancy.

However, it doesn’t take much for conditions to change and for volatility and fear to reappear. Hence we used May to book some profits on a few of our names and increase the cash allocation.