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Below are Views On Monthly Equity Views June 2021 by Sorbh Gupta- Quantum Mutual Fund

Monthly Equity Views: June 2021

S&P BSE Sensex increased by 6.67% on a total return basis in the month of May 2021. After the resurging covid-19 wave in April, markets have reacted positively to the fall in the new daily cases and overall positivity rate of infections this month. On a trailing twelve-month (TTM) basis, the index has returned 62.09%. A favourable base of May 2020 is getting reflected in the TTM return. S&P BSE Sensex has outperformed the developed market indices such as S&P 500 & Dow Jones Industrial Average which appreciated by 0.69% & 2.21% respectively, during the month. This has helped the S&P BSE Sensex to reduce the underperformance as compared to the S&P 500 & Dow Jones Industrial Average on a YTD basis

The broader market has done better than Sensex in the month of May 2021. The S&P BSE Midcap Index appreciated by 7.16% and the S&P BSE Small-cap Index rose by 8.93%. Power & Capital goods were the winning sectors for the month. As the Covid-19 wave receded during the month domestic focussed sectors saw renewed interest.

Quantum Long Term Equity Value Fund saw a 7.11% appreciation in its NAV in May 2021. This compares to a 6.94% appreciation in its benchmark S&P BSE 200. Outperformance for the month was driven by holdings in Financials & Consumer discretionary. Cash in the scheme stood at approximately 7.7% at the end of May. Our approach remains to position the portfolio towards economic recovery without undermining the risk associated with pandemic-related economic upheavals.

May has seen restrictions on mobility continue across most states. There has been some relief on the Covid-19 front as the daily new cases, active cases and daily fatalities all are trending down but the restriction on mobility has not eased. The state governments are exhibiting extreme caution to not repeat the mistakes of unlocking too quickly. Unlocking of restricted economic activity & general mobility should begin in June if the covid-19 cases continue to trend downwards. Maharashtra has already moved in that direction.

Inflation emerging as key risk:

We had flagged inflation as an emerging threat for economic recovery & equity markets in our last month’s newsletter. Since then, there has been some let-up in global base metal prices driven by Chinese government intervention. However, energy & food prices remain a concern. Retail petrol prices have already crossed Rs 100 per liter in many parts of the country and diesel is following closely. The higher transportation cost is expected to seep into general inflation. Further higher edible oil & pulses prices (India imports both these commodities in significant quantities) will add to the discomfort of RBI in maintaining the status quo on interest rates because food forms close to 50% of the CPI basket’s weight in India.

FII outflows continue for the second month:

After turning sellers last month FIIs have again sold Indian Equities in May. They have sold US$ 388 mn worth of Indian Equities this month vs. selling of $1.6 bn in April. On a YTD basis, FPI inflows stand at US$ 5.44 bn. DIIs have been buyers in May to the tune of US$ 280 mn. The sharp reversal in global interest rates and recurrence of covid-19 induced uncertainty remains a risk to near-term foreign flows

Equity markets moving from resilience to complacency:

Equity markets have welcomed the reduction of Covid-19 caseload and moved up sharply this month. They are already factoring in improvement in economic data and pent-up demand to some extent as the unlocking happens. Economic shocks like demonetization, an ill-planned GST implementation, IL&FS bankruptcy-induced credit tightness and lockdowns have tested the best of the corporate balance sheets & business models in the last few years. While larger companies are better placed to handle such jolts, it’s the smaller companies that face existential risks in such an environment. The small & midcaps indices are up by 118% and 86% in the last one year (vs. Sensex return of 62%) and reflect some sense of complacency in terms of risks. We would advise investors to exercise caution in this space.

Overall, Indian equities remain an attractive asset class and are expected to do well over the long term. A staggered investment approach via SIPs remains the simplest way to tide over market cycles. The last 12-14 months have also been a wake-up call for a balanced asset allocation plan and investors are suggested to ensure they spread their savings across Equities, Debt and Gold based on their long term goals and risk & return preferences.

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