Rupeeting Monthly Performance Update - October 2022

October 2022 saw a sharp bounce back in domestic equities - Nifty 50 was up 5%. This bounce-back in the markets was extremely lopsided though:

• The Nifty 50 (large caps) was up 5%, whereas mid and small caps were up by less than 2% each

• Within the Nifty 50, most of the rally was driven by banks, utilities, tech and consumers

The skew in performance drivers led to underperformance in all of our equity portfolios. And the sharp rally in the Nifty 50 led to underperformance in all our all-weather portfolios too.

Markets in October

Global and domestic macroeconomic conditions continued to get worse:

• Inflation in the US, EU and in India inched higher despite all the rate hikes

• GDP growth in the US was higher than expected, and the job market continued to remain hot, increasing expectations of continued aggression on rate hikes

However, there’s a key difference in how corporate earnings have been playing out:

• In the US, there was a series of bad earnings - Alphabet, Amazon, Meta and Snap all disappointed

• On the other hand, in India, 15 out of 22 Nifty 50 companies beat estimates

Markets however saw a sharp rally, both in the US and in India. While the Nasdaq 100 was up 4%, the Nifty 50 was up 5%.

Other asset classes remained tepid:

• Government debt was under pressure from all the rate hikes

• Corporate debt outperformed

• Gold has been steady

Rupeeting in October 2022 - Equity Portfolios

All our Equity portfolios underperformed the markets. We attribute this to:

Higher exposure to mid and small caps: During the month, while large caps were up 5%, mid and small caps were up just 2%

Lopsided performance of the markets: Even with large caps, the sectors that drove the rally were banks, utilities, tech and consumers. Because of this, only portfolios with large caps, and enough exposure to these sectors benefited

Digging a little deeper into the reasons for underperformance:

1. Rocketship: Higher exposure to mid and small caps

2. Monopolies: Higher exposure to mid and small caps

3. Disruptors: Exposure to stocks like Policy Bazaar, which have underperformed severely

4. Bread and Butter: Underperformance of stocks in the capital goods and building materials space

5. Value Migration: Minor underperformance

6. Socially Responsible Investing: Volatility led by portfolio concentration

Rupeeting in October 2022 - All-Weather Portfolios

We had reduced exposure to equities at the end of September 2022, and that saw a sharp rally last month (lol). This led to all our All-Weather Portfolios underperforming.

However, the decisions previously made continue to work in our favour and give us the confidence of better performance in the coming months.

What Worked for Us?

1. Reduced exposure to mid-caps relative to large caps

2. Split exposure within debt equally between corporate debt and government debt

3. Maintaining minimal exposure to Gold

What’s Next for the Market?

The impact of rate hikes hasn’t been seen yet in inflation, economic data, and in corporate earnings. With inflation control (and currency stabilisation) being a priority for the RBI, more rate hikes are coming. The impact of rate hikes and the spillover impact of weak global conditions pose a risk for the Indian markets.

Moreover, with India trading at a record premium to global markets, valuations don't really provide any cushion for if and when things go wrong.

Given this unfavourable risk-reward situation, we are negative on the Indian markets in the near term. That said, India’s fundamentals are extremely strong, and we’d like to ride the India growth story, but by only buying into the markets at reasonable prices, that is, when they see dips.