Geo -Political War Don't sit on Cash -Bulls & Bears

Despite numerous looming risks in the near term, Indian equities remain resilient, defying expectations of a correction. Investors grapple with the dilemma of where to allocate funds amidst a barrage of negative news. This analysis delves into the factors buoying the market against adversities and aims to gauge how long this positive momentum will persist, aiding investors in assessing risks. We need to understand who is having more weight on the market with various rationales from the Bulls' and Bears' Sides.

The Bears Grip

·       The Fed rate cut was significantly reduced from 6 cuts to 4 cuts and now it stands to 3 cuts which will drop to 2 rate cuts in CY 2024.

·       Further earlier the expectation of a rate cut was 300 bps to 175bps.

·       Iran and Israeli war eruption

·       Disruption in the Red Sea has already impacted the cost of shipping making goods more expensive.

·       Some products have seen an increase as high as 500%, while the average insurance premium has gone up 60%.

·       Oil prices have been rising recently in part due to geopolitical tensions and services inflation remains stubbornly high.

·       Industrial inflation is inching towards higher levels, and this leads to a steep cut down in forward earnings.

·       If the war breaks out, then this will escalate as a major war with many economies getting involved creating bottlenecks for the supply chain.

The negatives are getting nullified despite so many negative factors being discounted by the market. Well, it’s not the Modi factor which is keeping the market up. Its various macroeconomic unstoppable improvements keep the momentum of the market alive for new highs.

The Bulls

·       iPhone exports from India. FY 22 - $1.2 billion FY 23 - $5 billion FY 24 - $10 billion

·       Credit growth has accelerated and is tracking at a robust pace of 16.3% YoY as of March 2024 compared to 7.1% in December 2019 (pre-pandemic).

·       The ratio of credit to GDP has risen to 53.8% in F2024 from 49.7% pre-pandemic.

·       E-way bill generation touched an all-time high of 10.35 crore in March.

·       India's manufacturing PMI rises to a 16-year high at 59.1 in March 2024

·       During FY24 turns equity investors richer by Rs 129 lakh crore some stocks rallied up to 2,700%.

·       NSE registered investor base crosses 9 crores (90 million) unique investors (unique PANs) & 16.9 crores (169 million) total accounts

·       A total of 859 stocks on the BSE more than doubled investors’ money during the year 2023-24.

·       The major chunk of inflow is coming into the market from retail clients.

·       As of FY22, household savings in financial assets stand at Rs.28 trillion, twice the Rs.14 trillion seen in FY12.

·       Net Non-Performing Loans in the system are quite low at ~1%. Banking Tier-1 capital ratios are at a high of 15.7%.

·       Loan growth in the banks is trending near decade highs of 15% YoY. This compares with deposit growth of 12%.

·       On average, an Indian household holds 77% of its total assets in real estate, 7% in other durable goods (such as transportation vehicles, livestock and poultry, and machinery), 11% in gold.

·       India’s corporate sector has seen its Debt-to-Equity ratio reducing from close to 1.0x in FY15 to <0.5x in FY24.

·       India’s digital economy grew 2.4 times faster between 2014 and 2019, generating about 62.4 million jobs

·       The Indian Home Loan market has expanded at a healthy ~13% CAGR (growth in loan outstanding) over FY19-FY23 to Rs 29 trn

·       Institutional investments in the Indian real estate sector continue to rise at a steady pace, closing at USD5.4 billion during 2023, a 10% rise YoY.

·       While foreign investors continued to maintain a strong presence, contributing 67% of the total inflows in 2023, domestic investments have also seen an impressive YoY rise by 66% to USD 1.7 billion.

·       Expansion in the Indian home loan market and rising institutional investments.

·       Growing confidence in Indian markets from foreign and domestic investors.

 

Conclusion:

Despite initial scepticism, international interest in Indian markets is resurging, fueled by confidence in long-term growth prospects. While short-term geopolitical tensions may induce volatility, sustained liquidity and investment inflows shield the market. In one of my recent interactions and discussions with one Kenya-based IFA whom I had spoken to 2 years before and discussed India, she reverted that they are not looking towards Indian markets.

Now a week before she came back and enquired about Indian markets and looking ahead to get her client allocation for Indian markets.  The change in FPI and NRI investors has started happening. The geo-political war might create some short-term jitters but the long-term growth propensity remains intact. The reason why the market is not coming down is that there is enough liquidity in the market.

At the end of March, the total cash holding of all equity-based mutual funds stood at Rs 1.33 lakh crore. Then we have PMS and AIF funds along with the Insurance premium money followed by NPS and EPFO funds making a huge deployment opportunity which keeps any market fall protected from geo-political impacts. Further, as the election and exit polls start getting their reflection on the market, we will witness a huge surge in new investors coming and opening demat accounts and exploring investment options.   Further, as interest rates start coming down we will find the flight of capital from fixed-income products to equities which will get new highs for the market.

 Those who are looking ahead for long-term wealth creation and at the same time looking to reduce the blood pressure of doing lump sum investments now should opt for staggered investments. Since cash is the Devil when the market has so much to offer. It is not the Modi Factor but the Modi Reforms are playing the role behind markets new Highs.

 

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What we Do Not Know Behind Gold Price?

 

The global economy is already in the doldrums with Iran, Israel, and Hamaz tension over and above the Russia and Ukraine war. Commodity prices are set to increase and hence inflation increase cannot be nullified. Simultaneously as inflation goes up the forward outlook for interest rates will get reduced from 3 to 2 or maybe one from the U.S Fed. This will have a huge impact on reprising the equity valuations across the globe and hence new pricing outlooks will emerge in the coming days. Equity correction is bound to happen and hence it creates an opportunity for India to invest in the long term. Further many interest-sensitive sectors where the forward projection was that their earnings will grow as ROI falls will now get wait and watch mode and analysts will readjust the allocations in those sectors compared to what was envisaged previously.  On the other hand, healthy monsoon expectations for India followed by Mr. Modi getting his third term gives immense hope for long-term stability and progressive growth for India. The world now needs leaders like Mr. Modi so he can play a dynamic role in this global turmoil. Fear of COLD WAR Behind Gold The current rally in Gold has taken a good piece of mind of every investor across the globe and followed with this current geopolitical tension the value of the same will grow more.  However what I did not find in any media or research report that the actual reason for Gold being purchased in huge quantities by China and by the Big Central Banks. Well, it’s clear that what they envisage the rest of the world witness the same way later. The old school of thought of high inflation and hedging is now very old. The secrets behind the actions of the World’s Largest investors are often disguised and they can envisage those things which others cannot do. ·       Mr. Donald is going to contest for Presidential election in the U.S. Now his first election was influenced by Russia as per the media sources.  ·       When an election like the U.S. President happens one knows how much the same is being influenced by every country, by every billionaire, and by every powerful person on earth.  If he is going to win this time, then the same has been gauged by China and Russia. ·I  Readers will also accept that a character like Mr. Doland Trump is the need of the hour compared to any other person. Hence if he comes he will start the activities of the Trade war and will get manufacturing jobs out of China and many others. ·       If you remember the last time the same thing happened Gold went for a huge jump similar to the current one. ·       China has been reducing its U.S. treasuries and has now held 797.7 billion U.S. dollars in U.S. securities. In 2010 China had $3 trillion U.S Treasuries.   ·       If once again Mr. Donald Trum is back and Trade War 2.0 begins then many sanctions might be imposed which will create more problems for China, hence safe flight of exit is better now. ·       Trade war will push up inflation, and will change the supply chain, and hence that might be another reason why the U.S. economy is also not keen on reducing rates. ·       Another war funding preparation might be under the table which leads to huge buying of Gold and restricted actions on interest rates. But on the other hand, it has invested in Gold very aggressively. The PBC has been adding to its gold reserves for the past 16 months in a row, according to the World Gold Council. In 2023, the PBC bought more gold than all other central banks.  China’s central bank made its largest annual purchase in 2023 since 1977. China's purchases of the precious metal last year at 225 metric tons, roughly a quarter of the 1,037 tons bought by all the world's central banks. China's central bank now holds roughly 2,257 tons of gold in its vaults. Now why the central banks are buying Gold is also due to the expectation of geopolitical tensions and any Trade war escalation in 2025. Well, the price of Gold will jump significantly in the coming years mostly once the trade war bugle is blown. The currency will also react based on the geopolitical situations and will also impact the equities and other asset classes which will further push the price of Gold to new highs. Hence the current price is cheap based on upcoming predictions. Further, as China’s real estate and equity markets both are in the doldrums it's better to invest in gold and recoup the losses from this asset class in the coming years. Very clever act by China. On the other hand, global equity markets are at an all-time high, and any geopolitical shocks will get them down hence moving inflows from debt and equities into Gold is a safe option in every bad situation.  Once the interest rates start coming down China and its people could use Gold to pledge and increase consumption growth when in 2025 the situation might be worse for China or for the world. The Gold prices are currently much discounted if we compare with the unforeseen events expected to erupt starting from war to trade war.  Obviously, if we take the upcoming 5 years from now one will find that the global economy lacks leadership and this creates intense pressure on geo-political matters.

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Will You cut down on Midcap & Small Allocation in FY-25....An eye opener Insight

 

There has been a lot of noise in the market related to Midcap and Small cap and stress test results and in many places even the regulators are scared for the one-way rally of the segment. But did we try to find out where the inflows of the largest Industry of Equity Investments - Mutual Funds portray the final picture? What is the impact of the Stress test how do you find the inflows to carry forward and where do you find the retail India to invest from the 5% Equity allocation to 6% or 7% level?

Did you check where you have to rebalance and reinvest in the Financial year 2024-25? Will you follow the herd of the market or will you search for unique opportunities for wealth creation?

 Many investment advisors have given advice to invest in large caps and pull away from Mid and small caps. Few houses came up with the view of investing in Flexi cap rather than doing investments in Multicap and large caps. Then SEBI came up with some stress test numbers unreadable by investors and many financial advisors out of fear asked their clients to redeem their portfolio and shift into large caps and flexi caps.

 The recent data of the AMFI speaks that Small Cap witnessed profit booking whereas Midcap attracted inflows. The large-cap inflows were guided by two factors 1) One the large-cap underperformance became an opportunity for rebalancing from small-cap and midcap and 2)The large-cap rally will benefit from the Q4 results of FY-2023-24.

 Now in between the Midcap and small cap space corrected by hopping and lot of quality midcaps also corrected.  Even though the indices have been corrected by single digits, there are stocks in the market that have corrected by more than 50% to 70%. Segments like cybersecurity, artificial intelligence and emerging technologies hold growth potential for the information technology sector. Hence one will find quality Midcap IT companies to grow and create significant wealth in the coming years. If we look at the sector composition in midcap and small-cap space, we will find the manufacturing sector has more dominance. Now if the upcoming Indian GDP is focused towards manufacturing growth making India less dependent on imports and more one exports, we are bound to witness a major rally in midcap and small-cap space.  

 The biggest advice post-correction is that now you do the reinvestments back into those midcap and small stocks and Mutual Funds where you exited just a month before or a couple of weeks before. Re-investment is one of the biggest hurdles in today’s market. In March over 50 stocks with a market capitalization above Rs 500 crore plunged by 25% to 65%. Additionally, around 130 stocks have dropped by 20% to 25%.

 If we look at the AMFI data we will find Large Cap inflows for FY-24 was Rs.79694 cr compared to Midcap -Rs 113889 cr against Small Cap Rs 110317 cr. The numbers speak loudly that the Mid and Small-cap inflow in FY-24 was much higher and is still invested in the market and hence the valuation of the stocks will never come down historically it has come down or even expected to be down even in the worst nightmare. The strength of the Indian equity market is completely in the hands of the retail investors.

 The above data analysis does not include PMS or AIF. Flexi Cap, Multicap or Aggressive Hybrid etc allocation. Hence putting all those numbers in one place in a cumulative will push up the allocation in Mid and small cap to and new high. I hope now it’s well clear why SEBI’s stress test and other market rumours of correction will not play any role in getting reduced allocation. It is now a game of compounding for the Midcap and Small to have newer highs and more opportunity identification for investments.

 Even the Mutual Fund Industry stress test result failed to find any stress within Mid and small-cap categories. The beautiful thing is that all these activities led to a surprise correction in quality stocks and created new opportunities for the inflow of funds into this space.

 The retail investors of India are more risk-taking and they have more knowledge of portfolio and asset allocation models and they understand the midcap and small return story as compared to what an investor used to understand 20 years before.  The strength of the retail investor is proved when we find that retail investors have also pumped billions of rupees into mid- and small-cap schemes. In the calendar year 2023, small-cap and mid-cap schemes accounted for 40 per cent of the total net inflows into active equity schemes, receiving ₹64,000 crore of total inflows of ₹1.6 trillion. 

 Retail investors have always been on the lookout for a stock that would deliver multi-bagger returns within a year. The possibility of a large-cap stock generating a multi-bagger return is quite low due to their already established market positions with high market valuations. 

 If post-election we will find significant inflows coming in midcap and small-cap space and direct equity options are being explored aggressively. Between April last year and March this year, the average daily turnover in the cash space has jumped over 98 per cent, which showcases the strong demand for equity among investors.  Further, the average daily turnover of BSE equity derivatives contracts rises a whopping 2,400% to ₹34.6 trillion in FY24 from a mere ₹1.38 trillion in the preceding fiscal year. NSE’s turnover jumped 111% to ₹324.9 trillion in FY24 from ₹153.5 trillion in FY23.

  This reflects the maturity of the investors in the market. Furthermore with Nifty lot size being reduced to 25 will lead to more aggressive inflows from the retail clients.  Indian benchmark Nifty delivered robust returns, rising around 25 per cent in FY24 despite having higher global interest rates and geopolitical tensions across the globe.   Now when the tide is going to turn on the other side what numbers will come up on the table is very clear and so as the retail investors who will join the market post-election results of June 2024. In fact, we will find a surge in account openings once the exit poll numbers start rolling out. One will find significant rallies in quality midcap and small-cap post the correction and the major drive will be pre and post-election rallies, which one might call a biased rally. Further, once the ROI starts coming down the earnings will start picking up which will give a significant boost to the midcap and small-cap space.

 The midcap and small-cap companies are not leveraged as they have been historically. They are in a much better position compared to what it used to be 20 years before.

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