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Below The Monthly Equity Outlook On December by Christy Mathai, Fund Manager- Equity, Quantum Mutual Fund

S&P BSE Sensex rose by 4.9% in the month of November. S&P BSE Midcap Index & S&P BSE Small cap Index increased by 9.8% and 9.4% respectively.  Mid & Small Caps continue to outperform the large cap indices. Equities across the globe rallied in November, as some of the concerns regarding inflation and spike in energy prices due to geopolitical tensions moderated. Consensus seems to be off the view that Fed rate hike cycle is largely behind, US bond yield also corrected as a result. These developments led to strong rally globally, S&P 500 was up 9.1%, tech heavy NASDAQ 100 was up 10.6% and MSCI Emerging Markets Index was up 8.0% in November.

Economic activity continues to track well in India; the recent GDP print was strong at 7.6%, (vs 6.2% yoy) causing consensus to upgrade their GDP forecast. This ties in well with what we are seeing in listed space as well, where consensus is upgrading their earnings estimates highlighting resiliency of earnings.

Festive demand across sectors has been mixed; with sectors such as auto especially 2W auto showing good improvement. Sectorally, Real Estate, Healthcare and Auto lead the broader indices rally whereas Banks/ FMCG were the key under-performers. Banks were under pressure post RBI’s move to increase the risk weights in certain retail focused unsecured segments. Broadly, management commentary in most of the domestically focused themes look constructive barring IT, where outlook continues to be weak. In terms of flows, post large outflow during October, FIIs turned buyers with inflow of USD 2.3bn in the month of November. DIIs were net buyers with $1.7bn inflows

Quantum Long Term Equity Value Fund (QLTEVF) saw an increase of 7.3% in its NAV in the month of November 2023; Tier-I benchmark S&P BSE 500 TRI and Tier-II Benchmark S&P BSE 200 TRI increased by 7.0% and 6.7% respectively. Our portfolio stocks within Consumer Discretionary (Auto), utilities and IT did well; being underweight relatively expensive consumption sectors also helped. Some of the portfolio stocks within auto are seeing good traction during the festive period, and incremental expectation is of a sustained recovery. Financials were a key drag in our portfolio mainly due to increase in Risk weights across the unsecured space. Banks in our portfolio are well capitalised and the current move by regulator should not cause any immediate need for capital raise or meaningful slowdown in growth.

Impact of increase in RWA (Risk-Weighted Assets) on banks

RBI for some time has been flagging the high growth witnessed in specific segments of consumer credit, especially unsecured lending. The unsecured book across Banks, NBFC have growth at faster clip than overall Retail growth especially post covid. And in that context RBI has increased the risk-weights (+25%) on several categories of retail credit. Impacted segments are Personal Loans/Credit Cards/ as well as banks’ exposure to certain NBFCs. The possible impact on industry could be an increase in yield in the impacted categories to justify higher capital consumption and potential slowdown in growth. From portfolio perspective, Banks in the portfolio are well capitalised and there will be no immediate need for capital raise or any meaningful slowdown in growth.

So looking forward, Earnings growth remains resilient, quite in line our expectation of Indian economy being in a cyclical uptick after years (2015-20) of sluggish growth; this should be supportive of broad-based earnings recovery. Valuation barring certain expensive pockets look marginally higher than historical medians. With decadal high global interest rates, there has been general reset of valuation expectations; and in such an environment it is quite possible that some of these expensive pockets can correct. We broadly expect broader markets to track earnings growth.

Near term risks in our view are negative surprises on inflation trajectory, global slowdown, lack of pickup in rural demand and political uncertainty as the country heads into elections next year. To conclude, our portfolio is well positioned to benefit from cyclical economic upcycle over the medium term with major overweight being Financials and Autos. While there could be uncertainty emerging globally or in India; investors should not be unnerved by the near-term volatility and focus on allocating prudently to equities based on their financial goals. Any sharp correction due to near-term headwinds can offer additional valuation comfort and should be used to allocate more to equities with a long-term perspective.

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