ABC Portfolio - Sep '23 update

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

Performance

Sep ’23 saw deep cuts across equities, bonds, currencies and precious metals globally. As the US economy seems stronger v/s EU or Asia, long bond yields in the US moved up sharply causing the yield curve to be less inverted. This makes the USD more attractive and reduces the prices of other assets.

Indian equity indices were positive defying the global weakness with small and midcaps outperforming. Foreign (FPI) investor selling in Aug & Sep was matched by domestic investor (DII) buying. State owned firms were the biggest gainers, while Private banks and Staples were subdued. Indian bonds & FX corrected but were calmer v/s global peers.

Developments in trends we invest into in the ABC Portfolio

Manufacturing ecosystem – We capture this via input providers like energy, materials & automation. The G20 summit saw landmark announcements such as the India - Saudi power grid linkage plan and the Global Biofuel alliance. These initiatives can strengthen India’s energy security via renewables.

Organized agri-business – We capture this via the farm to fork supply chain, plantations & fertilizers. The global biofuels alliance works to India’s strength in agriculture. Raw materials i.e. Biomass & Agri waste are plentiful. Biofuel production at scale can help in energy security and rural employment.

Supporting infrastructure – We capture this via infrastructure, logistics and real estate. The India-Middle East-Europe Economic Corridor (IMEC) was one of the biggest announcements at the G20 summit. It can rival China’s OBOR and place India in a pivotal role in re-wired global supply chains.

National Champions – We capture this by replicating the Chinese strategy of consolidating the state owned banking and oil & gas sectors. The vertical integration process for State owned oil & gas firms has underway with large refining and petrochemical expansions underway. Plans for critical mineral acquisitions needed for the energy transition are being formulated.

Digital platforms – We capture this sector via digital platforms that benefit from digital public goods (DPG) i.e. interoperable public tech protocols that private parties can plug into and operate. The G20 summit offered India an opportunity to showcase its prowess in this area.

Summary & Outlook

Global markets across asset classes converged downwards in September. This was also seen in the form of FPI selling in India. Interestingly, Jan to Sep ‘23 has seen ~2.8 bln$ of selling by FPIs but a massive 15.7 bln$ of buying by DIIs. This is similar to China in the 2000s when domestic investors started becoming the bigger driver of markets.

We have moved to a more volatile phase in global macro. Bonds have been the worst performers since 2020 as yields rose from 0.5% to ~5%. Its rare for such moves to not have consequences as bonds represent both the price and the source of money i.e. collateral in a highly levered world. This would imply a valuation adjustment in equities in a normal world. However if faith in the system is questioned, then assets perceived to hold value will see inflows.

In the ABC Portfolio, across our themes, the names we own cater to India’s basic needs for economic growth, their replacement costs are high and disruption is difficult. These are likely to do well in a normal world as well as hold their value when normalcy is questioned.