It was again a very challenging month of March, with news flows pertaining to global banking stress and stability taking precedence over everything else. The first half of the month saw a total risk-off globally as investors grew increasingly worried over issues related to Silicon Valley Bank and other regional US Banks and Swiss Credit Suisse survival. However, a combination of US Fed support and takeover of Credit Suisse by UBS allayed fears, leading to a smart recovery in equity markets. Surprisingly, most developed countries’ equity markets ended the month with gains. All major US indices ended with gains, with Nasdaq rising the most. Indian markets also saw a better last week in March, with NIFTY50 managing a small gain of 0.3% for the month. Broader markets were generally weak with BSE Midcap and Small Cap 250 indices being down 0.4% and 1.3% respectively. After a long time, both FIIs and DIIs turned net buyers – FIIs to the tune of USD ~1 bn and DIIs to the tune of USD 3.7 bn.
For Indian equity investors, the year FY22-23 was also very challenging with the war, interest rate hikes, high inflation, global banking collapses and sporadic cases of covid still lingering, playing their role. Equity returns were almost non-existent with heightened volatility. There have also been sharp sectoral churns with focus shifting to profitability in businesses in the high interest rate environment. There was also mean revision in most input prices and many companies had to give away their covid period gains. This volatility has come as an opportunity for value conscious style of investors like us as we get to accumulate and gradually build positions using this volatility.
In the challenging global outlook, India stands out for the global investor. The potent combination of Democracy, Demographics, Domestic economy, and Digital Infrastructure; is being appreciated and that should mean that Indian economy will be the fastest growing large economy for the next few years. India is embracing digital payments and transactions with open hands, and this is bringing in rural inclusion along with productivity gains. Manufacturing has picked up owing to government focus on “Make in India” and the attractive Productivity Linked Incentive scheme (PLI) is leading to capex for capacity additions. China + 1 has meant that it is not just IT+ Pharma, but new sectors like chemicals, textiles, garmenting, consumer goods, etc that have seen pick up in exports. With a pragmatic and focused government in place we can expect this momentum to continue.
There have been no returns delivered by Indian equities over the last 18 months. This, along with the almost 25% growth in earnings during that period, has led to the valuations of Indian markets come almost to 10-year trend. NIFTY50 now trades at ~18x FY24 and ~16x FY25 earnings, providing opportunities to generate decent returns. The sharp fall in broader markets have also opened-up avenues to generate alpha over the market returns through investing in the less obvious names. We will continue to focus on profit making companies, where there is visible decent profit growth, and where what we pay today will be more than made up by way of future profitability.