Dear Investor,
The second wave of Covid has been devastating and feels like it’s literally at our doorsteps. We have all been affected this time around, and for all of you who have lost their loved ones please accept our heartfelt condolences. For those of you fighting this disease, we wish you a speedy recovery.
With respect to the markets, last month saw further volatility as the number of cases and lockdown restrictions rose. But, our fund still managed to earn a small 0.13% return compared to the (0.41%) fall in the NIFTY.
As we have witnessed in the US, UK and Europe, the focus has been on the fast rollout of vaccinations and India will be no different. We will have a better understanding of the pace of vaccination by the end of this month. Undoubtedly, this will have an impact on both GDP growth and corporate earnings. Indeed, consensus forecasts are quickly being revised down, moving towards our estimates of 10% GDP growth and 20-25% earnings growth. At this point, we think this is likely to be a “quarter” setback but the risks are obviously skewed to the downside.
The earnings season so far has been in line with the lofty expectations of the market with IT and Private Banks leading the way. The narrative around the outlook has understandably become a little hazy, given the onset of lockdowns. The auto industry and auto parts suppliers, for example, are facing the triple headwinds of the lockdown, margin pressure as input costs rise, and a global chip shortage affecting car production. We do believe the market will try to look beyond this temporary setback, and that India Inc is much better placed and prepared than last year.
The RBI which, in our view, has done an outstanding job throughout the pandemic will likely remain extra accommodative in terms of keeping ample liquidity in the system and helping the financial sector navigate the latest headwinds. But, if this situation extends beyond a quarter, then we would expect some form of Government intervention too.
Elsewhere, the steady pace of vaccinations particularly in the US, UK and Europe is leading to a rapid reopening of their economies, and with it unleashing the pent-up spending of consumers. It seems to us that this will lead to a strong pick-up in growth over the summer, and in turn lead to further anxiety over inflation -- whether its transitory or more sticky. We feel the central banks will let the economy run “hot” over the summer, with likely talk of tapering at the Jackson Hole meeting of Finance Ministers in late August 2021. So, with the blockbuster results by many of the leading tech companies, and economy facing sectors just starting to pick up, markets may continue to rise, fueled by ample liquidity. That said, we wonder if the “Sell in May and go away” might make a comeback.
Fund Positioning
In April, markets were volatile with the breadth of the markets subdued, as the environment started deteriorating. As a measure to tackle the volatile markets and lay low for some time, we have reduced our overall exposures. For us, capital protection is paramount and thus we degrossed. We will continue to be at lower exposures till the situation stabilizes, which we estimate will last for 1- 2 months. In the current situation in terms of sectors, defensives are likely to outperform benchmarks, whereas once things stabilize we may see preference towards economy facing stocks returning.