Global
Global inflation is inching upwards with the rise in commodity and crude prices. Oil prices rose to the highest levels in a single month over several years (up 7% MoM), and this coincided with Indian market underperforming to most of its global peers.
As several emerging market (EM) central banks have already adopted monetary tightening in last few months, all eyes are now on Fed tapering plans. It is highly likely that it will be announced in November meeting itself and it would be interesting to see by what quantum and for how long. However, US GDP’s latest edition was disappointing due to lower inventories and investment. This could be a reason for FED to further push the rate hike argument.
Logistic issue was the central theme in the recently announced results of a few global consumer companies. Also, the suppliers’ delivery timing dipped in October despite easing of Covid restriction across Asia. In the coming months, uneven global growth and inflation may keep volatility higher. The FED announcements November will be the key event to watch out for.
India
With Covid cases ebbing and vaccination crossing 1bn mark, we expect a swifter activity normalisation. India’s manufacturing PMI continued to expand with a reading of 55.9 in October, the fourth expansionary month in a row. This was largely led by gains in new stock orders. India is not the only outlier as EM Asia PMIs and DM PMIs also improved. From current level, we expect service PMIs to take lead from manufacturing PMIs as was seen in US GDP print.
Real estate market (esp. organised) is recovering at a swift pace supported by large scale hiring by IT companies, and large lenders. This along with flourishing unicorn market has turned around the luxury segment in particular, after several years. This could be the start of a potential household capex, and a lower interest rate expectation is supporting the case here.
Result season so far has been comforting. On an aggregate basis there is no major change in broad earnings estimates. However, there were a few consumer discretionary companies, where raw material inflation impacted EBITDA margins. Commentary on demand is positive from most corporates, though a few large companies hinted towards sluggish rural demand owing to erratic monsoon. Higher input cost has stalled the earning upgrade cycle making it narrower. For FY23, the largest contribution to earnings will come from commodity and financial sector.
Lenders have reported negligible net defaults, hinting towards the end of (Nonperforming loan) NPL cycle. However, system wide credit demand is still lagging. Deleveraging by large corporates is impacting overall credit demand but, overall retail demand is recovering. We believe macro set up is becoming more conducive for large financiers as we move into CY 2022.
Portfolio stance
We expect volatility to stay high given India’s massive outperformance to its peers in the recent months. From a valuation standpoint both relative and absolute, India is still an expensive market. Hence, we are adopting cautious approach from a near term perspective and would be taking exposure where we have higher earning visibility at reasonable valuations. From a medium to long term perspective, we are positive on lenders and consumer discretionary (including automobiles). We have seen first sign of outperformance from lenders, autos and utilities sectors (all laggards) in October 2021.