Alpha Strategist April 2024 Report from Motilal Oswal Private Wealth
FinTech BizNews Service
Mumbai, April 24, 2024: According to Alpha Strategist April 2024 report by Motilal Oswal Private Wealth (MOPW), The breadth of the rally is narrowing; the number of stocks generating positive returns within the Nifty500 universe has narrowed from 452 in Q1FY24 to 268 in Q4FY24. In the last quarter (Jan[1]Mar'24), 70% of the Large Cap universe generated positive returns vis-a-vis 57% in Midcap & 45% in Small caps.
Sector performance is also witnessing rotation. E.g. Finance (non-Banks), Auto, and Healthcare which had lagged for most of FY24 have been among the top performers last quarter, while Power & Infrastructure, which had dominated the rally, have started to lag.
The trend of net inflows in Equity Mutual Funds continues to remain healthy. Since Aug'23, the combined categories of Multicap & Flexicap funds have witnessed highest inflows while the Midcap & Small cap fund categories have seen a declining trend since Oct'23
Over the last five years, India's capital markets have witnessed vibrant participation from domestic retail savers, with Demat accounts surging to 151 mn in Mar'24 from 36 mn in Mar'19. India Inc. has raised USD 92.9 bn through primary markets during this period. Expectations of political continuity augur well for market sentiment. Corporate earnings growth may witness moderation relative to the pace witnessed over the last few years but is expected to remain steady given the robust health of India Inc balance sheets and the ongoing capex cycle. BFSI, Infrastructure and manufacturing are likely to be the key focus sectors going forward.
Equity Portfolio Strategy
MOPWs Temperature Gauge Index shows that Large Caps are in fair valuation zone. For incremental allocation to equity, MOPW suggests investing in lump-sum with a bias towards Large Cap & Multicap strategies across MF, PMS, AIF platforms. For select Mid & Small cap strategies, investors can adopt a staggered approach over the next 6-12 months. MOPW reiterates emphasis on Investment Charter and Asset Allocation without trying to time the market.
Fixed Income Portfolio Strategy
MOPW continues to hold our view to increase duration in the fixed income portfolio so as to capitalize on the softening of yields in the next 1-3 years
65% - 70% of the portfolio can be invested in combination of
Gold & Silver Outlook
Gold prices have witnessed a surge in recent months, attributable to demand from China and ongoing geopolitical events. Allocation to Gold can act as a hedge against any heightened volatility in a portfolio constituting risk assets. Silver continues to have strong demand outlook because of factors like Industrial demand boost ,Boost in Manufacturing and Industrial activity in China, Potential for pickup in Green tech, etc.
Equities Surge on Economic Optimism
Global equities had a banner first quarter, with the MSCI ACWI returning 7.4%. In the U.S., the S&P 500 surged 10.6%, once again driven by outsized gains in mega-cap growth stocks. The "magnificent seven" posted earnings growth of 56% in Q4 2023, lifting overall index earnings by 8%. Japan was the standout performer, however, with the TOPIX soaring 18.1% despite the start of monetary policy normalization by the Bank of Japan. European equities lagged the U.S. and Japan but showed signs of strength late in the quarter as global investors were drawn to cheaper valuations and a narrowing growth gap. Emerging markets rose a more modest 2.4%, weighed down by concerns over a lack of Chinese stimulus.
From a style perspective, growth stocks dominated, returning 10.3%. However, the prospect of rate cuts and better economic growth also benefited cyclical sectors like financials, industrials and consumer discretionary late in the quarter, offering hope for a healthy broadening of market leadership.
Fixed Income Faces Headwinds
While equities celebrated economic resilience, it proved more problematic for bonds. Stickier inflation, steady activity, and a slightly more hawkish Fed tone conspired to push rates higher and bond prices lower. The Global Aggregate Index fell 2.1% as yields rose 28 basis points. Rate sensitive assets like real estate also struggled, with global REITs down 1.5%. High yield credit outperformed thanks to its lower duration.
Fed Maintains Dovish Tilt
The Fed held rates steady in Q1 but maintained its projection for multiple rate cuts starting in 2024. While slightly fewer than previously anticipated, the cuts still point to an extended easing cycle ahead. The Fed also upgraded its growth outlook and reiterated its view that inflation will gradually return to 2%, albeit along a bumpy path. Chair Powell discussed slowing the pace of balance sheet reduction as well, further supporting risk assets.
Looking Ahead
The strong start to 2024 is certainly a welcome development for investors. If the much hoped for "Goldilocks" scenario of moderating inflation without a significant growth sacrifice plays out, risk assets could continue to advance. However, high valuations leave little margin for error. The good news is bonds are providing more competitive yields, while equities with attractive shareholder returns can add resilience.
Indian Economic Review
Current Account Improvement
India's current account deficit (CAD) narrowed to 1.2% of GDP in the third quarter of fiscal year 2024, down from 1.3% in the previous quarter and 2% a year earlier. This positive development was led by a record high services surplus and stronger income account inflows.
The lower than expected current account gap of $10.5 billion last quarter can be attributed to a jump in India's services surplus to an all-time high of 5% of GDP. Robust software, business and travel exports drove this increase. Private transfer receipts, mainly representing remittances from overseas Indians, also rose 2.1% year-on-year to $31.4 billion.
Importantly, India's current account balance excluding oil and gold imports increased sharply to a surplus of 3.3% of GDP from 2.9% a year ago. This suggests the underlying external position remains healthy despite high commodity prices.
Capital Flows and Forex Reserves
However, capital inflows moderated to 1.9% of GDP from 3.5% in the same quarter last year. While FDI and FPI inflows picked up, overall flows were dampened by lower "other investments". This resulted in lower forex reserve accretion of $6 billion in Q3FY24 compared to $11 billion last year.
The domestic savings rate also increased to a healthy 28.3% of GDP in Q3FY24. The improvement in India's external and domestic imbalances bodes well for macroeconomic stability
Government Finances
On the fiscal front, total spending rose 7.3% year-on-year, with capex accounting 80% of the expenditure. However, total receipts growth moderated to 10.1% despite strong personal income tax collections.
With the economy expected to slow, achieving next year's ambitious 11.6% growth in gross tax revenues will be crucial. In this context, the strong 11.5% rise in GST collections to a record 1.78 trillion in March 2024 is encouraging.
Conclusion
In summary, India's current account deficit has narrowed sharply on the back of strong services exports, while capital inflows have moderated. The government's fiscal position has also improved with higher tax collections and capital spending, though risks remain. Continued fiscal consolidation and structural reforms to boost domestic productivity and exports will be key to strengthening India's external and fiscal health in the coming years.
Equity Markets: India's Growth Trajectory Remains Robust
India's growth story continues to unfold positively in FY 2023-24, supported by a confluence of factors. Despite global headwinds like geopolitical tensions and commodity price volatility, the domestic economy has displayed resilience. Key indicators such as lower unemployment rates and rising industrial output point to a healthy investment climate.
Several tailwinds are propelling India's growth momentum. Recovering rural demand, buoyant capital markets, improving corporate capex and external demand are providing a fillip to the economy. Fitch Ratings' upward revision of India's GDP growth forecast for FY 2024-25 to 7% from 6.5% earlier is a validation of the country's positive fundamentals.
Cyclicals Driving Capacity Utilization
A notable trend in India's growth story is the improvement in capacity utilization, largely driven by cyclical and capitalintensive sectors such as auto, metals, capital goods, cement, and petroleum products. This suggests that corporates are investing to keep pace with rising demand. Capacity utilization stood at a healthy 74% in Q2 FY24 and is expected to have risen further based on the surge in manufacturing PMI during Q4 FY24.
The uptick in volumes is primarily led by sectors related to manufacturing and infrastructure, rather than fresh capacities, indicating that the private capex cycle is still in its nascent stages. On the flip side, consumption-linked sectors are witnessing muted volume growth, with some segments like apparel, furniture, electronics, wood, tobacco, and chemicals even seeing a sharp slowdown.
Corporate Profitability & Investment Outlook
The corporate profit upcycle in India is showing signs of sustainability. While the current pace of expansion may moderate, double-digit profit growth is still likely, given benign commodity prices and rising demand. Importantly, corporate balance sheets are healthier than in previous cycles, with companies having raised resources from equity markets, keeping leverage under check.
FY 2023-24 was a strong year for Indian equities, with the S&P BSE Sensex and Nifty 50 clocking gains of 24.85% and 28.61% respectively. However, the markets told a tale of two distinct halves. While broader markets outperformed frontline indexes in the first half, large caps took the lead in the latter part, especially post the state election results in December 2023.
The Nifty surged nearly 11% from December to March, while the median return of the top 250 small caps was just 3.8%. In fact, 34% of the top 500 companies and 42% of small caps delivered negative absolute returns during this period. This disconnect between the Nifty and broader markets could be attributed to factors such as attractive relative valuations of large caps post the small and mid-cap rally, regulatory concerns over potential overheating, and resumption of FII flows which favor large caps.
