ABC Portfolio - Oct '22 update

Performance & Portfolio updates - Oct '22

Performance

Oct’22 saw a positive trend in equity markets in the face of a weak sentiment. The fall in EUR and JPY halted thereby stabilizing the FX markets. Bond yields saw a sharp rise followed by a quick reversal. Key inflationary factors like oil & gas prices and shipping rates also eased out. Some central banks reduced the intensity of rate hikes building hopes of a similar reaction from the FED. These factors combined to give a relatively positive environment for equities and other risk assets globally.

The Indian equity markets were resilient in the 1st half of Oct when global markets fell followed by a strong rally over the 2nd half. The breadth of the up-move was broad-based across sectors with PSU’s, banking and IT being the strongest.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – Production led incentive (PLI) schemes have been announced in electronics, pharma, telecom, food, white goods, textiles, EV batteries, steel and drones. The Govt. aims to boost pvt. sector capex via PLIs to create growth & jobs. More PLIs are expected in the coming budget. We aim to benefit from this growth in manufacturing capacity.

Organized agri-business – Despite India being the 2nd largest agri-producer, it’s share of global agri-produce exports is negligible. The Ukraine war has given an opportunity to increase that as food value chain diversification is a priority now. This is reflected in India's agri & food exports rising by 25% in Apr-Sep’22. Farmer collectives, modern supply chains, market linkages and scientific farming will be key for becoming a top food & agri exporter by 2030.

Supporting infrastructure – The National Logistics Policy (NLP) unveiled in Sep’22, lays out a vision for reducing India’s logistics costs from 13-14% to 8% of GDP, via a higher share of railways, multi-modal parks, water transport, pipelines and digitization of the chain. The policy will catalyze logistics & infra building including the potential for divestments & asset monetization.

National Champions – Large state owned enterprises (CPSEs), Railways and the highway authority (NHAI), achieved 43% of their annual capex tgt. in Apr-Sep’22 by spending ~35 bln$. As the first half is usually weak, this suggests accelerated momentum in public capex. This spending is key for counter-cyclical growth and India’s evolution from a low to a middle income country.

Digital platforms – Key elements of the digital eco-system were in the news. Telecom cos. started the roll-out of 5G services, required for enabling IOT at scale. The RBI did a pilot test of its wholesale CBDCs and will follow shortly with a test of the retail CBDCs. Central bank issued digital money will link the digital and physical worlds and enable a digitized economy.

Summary & Outlook

The resiliency of Indian equity, bond and FX markets over the past year has been remarkable. The fact that mortgage rates in the West (~6-7% now) are equivalent to those in India (7-8%) is unprecedented.

It potentially signals a reduction in inflation risk premia for India, which can attract global capital flows and fast forward India’s transformation. At the same time, risks from global FX & bond markets and geopolitics are very real and can cause periodic bouts of market volatility and downsides.

Our strategy continues to about investing in the key trends enabling India’s transformation while using market volatility for managing entries & exits.