Market Update – May 2022

Global equity markets had a very volatile and challenging month of April. Indian markets also followed a similar trajectory, though they did outperform its global peers on the percentage of drawdown. Global risk off due to persistent high inflation and the resultant rising bond yields, prospects of aggressive monetary policy stance by the US Federal Reserve, and the continuing conflict between Russia and Ukraine war were the major reasons for this correction. Possible impact on global supply chain due to stringent lockdowns in China after seeing the surge in Covid-19, added to concerns on operating margin pressures on corporate. The NIFTY 50 ended the month down 2.1% though amidst huge volatility, the broader markets ended flat to positive with S&P BSE Midcap and S&P BSE 250 SmallCap being up 1.3% & 0.4% respectively.

Equity markets in India have also reacted in line with the global trends. Rising inflation can impact demand and force central banks to rise rates faster than expected. Input costs inflation and high energy costs are also headwinds both for consumer demand as well as corporate margins. The global equity risk off has also led to unprecedented selling by FIIs, putting pressure on stock prices. However, on the positive side, demand continues to be very strong in the economy. Record income tax and GST collections highlight the inherent strength in the economy. Rural income is expected to be very strong, led by record food grain and agri productions and very high agri commodity prices. Domestic flows into equity continue to be strong and have more than negated the FII outflows, presenting stability to the equity markets.

Earnings season has been decent with companies reporting inline numbers but the issue has been on guidance where many corporates have guided for margin pressure in the coming quarters. We are closely monitoring our portfolio companies performance on the earnings front and will not be shy to exit some names where we feel there is a permanent hit to margins. Domestic liquidity continues to be strong and we expect this trend to continue. Foreign flows too should normalise over the next 3-6 months once global inflation starts to temper.

We believe that we are entering a phase of consolidation in the markets and expect very minimal correction from these levels. Though the markets might remain range bound in the very near-term, opportunities are opening up in selective stocks. We would be constructive and be investors while focussing on our fundamental philosophy of buying companies with profit growth and where fundamentals merit the valuations they are trading at.

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Market Update – April 2022

The month of March saw the peak of hostilities between Russia and Ukraine. However, surprisingly most global markets recovered sharply from the initial jitters and logged in good gains for the month. Indian markets too recovered with NIFTY 50 index reporting a 4.0% gain. Broader markets represented by S&P BSE Midcap and S&P BSE 250 SmallCap, were up 3.2% & 6.1% respectively. Almost all major global equity markets are higher than where they were just before the Russian intrusion into Ukraine.

Despite multiple headwinds, FY22 has ended with decent returns of over 18.9% for NIFTY 50, with the broader markets doing better. Multiple challenges have been met with optimism as investors look forward to a period of good economic and corporate profit growth. Rising inflation and ensuing increasing interest rates come across as the biggest macro-economic factors to track. However, our view on crude oil is quite benign, with prices more likely to be $60-70/barrel by June/July 2022. (our note of Feb 2022 Views on the Current Events). Hopefully, reduction in the intensity in the Russia/Ukraine region will also lead to softening of other commodities and allay the fear of inflation meaningfully.

In the immediate near-term, some companies and sectors will surely face margin pressures. However, demand scenario continues to be very strong, as the country opens up to normalcy after two years of Covid related lockdowns. Agri produce and prices have been very good this year and this makes us believe that the Indian rural economy will witness strong growth over the next year. The China +1 strategy is only getting stronger with India reporting an export of over $400bn for the first time ever in FY22.

However, the importance of a stable democracy could not have been more pronounced as in the recent past, with China and Russia giving global investors big shocks. Our view is that it is a matter of time before global investors become net buyers of Indian equities. Domestic investors look like continuing with their confidence in Indian markets and that also bodes well for the performance in the new financial year

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Market Outlook – Views on Current Events (Feb 2022)

Last couple of months has been a challenging period for equity investors globally. Even in India, while the headline Nifty 50 has shown smaller correction, the broader markets have seen significantly higher drawdowns across sectors. Off course, quite a few such reasons have cropped up including inflation, interest rate increases, crude price rise and the Russia-Ukraine stand-off among others. Notwithstanding the fact that these headwinds are serious, we try to analyze various factors with logical reasoning and data points in the attached note.

The worst seems to be discounted and though we might not have a sharp V-shaped movement, markets should start to move into positive trajectory. We continue to maintain our stand that the past two years market returns were extraordinary and will not be repeated but decent mid-teen returns over the next 3-4 years are still possible. A near-term event to be watched will be the state elections, particularly the outcome in Uttar Pradesh.

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