Halt in the March! India Strategy ! November, 2019


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In the last couple of years, we have experienced a significant polarization in price performance as a shrinking profit pool has led to investors herding into the safety of the select few companies that continue to grow at a reasonable pace.

Last Diwali to this, while the Nifty is up over 9.7%, the Nifty Midcap 100 and the Nifty Smallcap 100 indices are down over -6.5% and -9.5% respectively. The market breadth should improve as investment cycle revives and profit growth becomes more broad-based.

We have seen green shoots in the recent earnings season, and with the i) benefit of corporate tax cut to support earnings from next quarter onwards, ii) a lower base effect and iii) a reasonably better monsoon boosting rural demand, we may finally expect a revival in corporate earnings.

Globally, central banks are pumping liquidity to boost their economy, Fed has cut interests by another 25 bps, China and the US are inching closer towards an agreement on trade talks in a phased manner and the ‘Brexit’ is deferred until 31st January 2020. All these events have provided an adequate amount of tailwinds for emerging markets such as India.

However, the recent run-up has also taken valuations way above +1 standard deviation mark and markets may take a ‘Halt in the march’ from hereon, this pause will help participants to evaluate the changing trade dynamics and likely perception of investors, domestically and globally.

We believe that any declines hereon shall be seen as opportunities to invest for better returns in the next 1-2 years. As we have highlighted earlier, we continue to believe that mid and small cap provide relatively better entry points than their larger counterparts for medium to long term investments.

For Fixed Income, the near term growth-inflation dynamic along with an elevated term premium (premium of long-term bonds over short term bonds) should keep a ceiling on bond yields. Within corporate debt, polarization in favor of top quality continues as many others struggle to borrow. This may be a cause of concern, for now, however, an economic revival can change this eventually.

We continue to believe that the term premium may remain elevated in the near term and any exposure to debt markets should be taken through the short term to medium term debt funds with a high-quality portfolio.

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