We lauched our five thematic equity portfolios in October 2021. They are all based on unique themes that we believe in. However, since then, the markets have been volatile. Overall the Nifty 50 index from October 2021 is down 1%, however, with major swings in the interim. Changes in the portfolios
Why the changes?
Rocketship
Value Migration
Monopolies
Disruptors
Bread and Butter
What’s changed?
A few things are changing domestically and globally, which makes us optimise portfolios for better positioning and potential returns.
Central to them is the fact that inflation globally has been persistently high. This is likely to result in monetary policy normalisation by central banks.
In English: Central banks have been pumping money into the markets, buying bonds, reducing rates, etc. in order to support growth. However, this causes inflation. Now that inflation is high and persistent, central banks may reverse these actions in order to reverse inflation.
Inflation and monetary policy normalisation can impact the market in several ways.
The US Fed starts raising rates in 2022. Foreign investors start getting out of emerging markets like India and start moving to the US. Why? Basically, they get a higer rate of return for much lower risk.
As a counter to high inflation and to reduce the impact of liquidity movement from India to developed economies, the RBI may increase rates in India in 2022.
Higher inflation usually means bond prices drop. Why? Because higher inflation erodes the present-day value of the future interest payments a bond will make, as well as the amount an investor gets back when the bond matures. However, the prices of longer-dated bonds tend to fall more.
How will this impact the equity markets?
Theoretically, equities have been a good hedge against inflation in the long run. However, over shorter time periods, stocks have shown a negative correlation to inflation.
Where we stand at the moment though is that we are on the right side of an earnings growth cycle. Demand revival has been strong, we’ve had two consecutive years of good monsoon and an upcoming election in 2024, which gives enough visibility for sustained (or better) earnings over the next two years.
However, valuations are at their peak. Typically in a rate-increase cycle, there is a de-rating seen in valuations. Future cash flows are discounted at a higher rate, and hence valuations go lower. With this, stock prices will depend more on earnings growth going forward.
Preferences of Rupeeting
We would like to depend more on earnings growth, than valuation plays. On earnings, we would focus more on quality and visibility.
Overall, we would prefer largecaps over midcaps. This would protect us from potential shocks on valuations, or in the markets.
We would look for pockets in the markets that we are positive on. For example, given the 2024 election cycle, we are of the opinion that high amounts of spend would be seen in the areas of infrastructure, cement and real estate. We would similarly seek other pockets of high growth.
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