Journey Vs Destination
01st April 2023
Dear Fellow Investors,
Hope everyone is keeping healthy and happy.
With BSE Sensex and Nifty 50 both down by 2 per cent on a YTD basis, one could argue that the worst has been priced in already given the tailwinds.
The Indian markets are underperforming the US on a YTD basis by a small margin.
Could 2023 be a different year where the Indian markets gain their mojo back and start outpacing their global peers?
On the macro front, the latest concern facing the economy is about the poor monsoon due to the high probability of El Nino. With our agricultural dependence, the advent of El Nino this time around when inflation is already bothering the market condition. Food inflation can also shoot up owing to the below-average monsoon. Global inflation remains a key risk.
However, the market is discounting the peaking of interest rates in the first half of CY 2023 and hence equity prices may not react violently to any increase in interest rates in the coming months.
In our newsletter, we would like to discuss specific sectors and their impact today on the economy.
1. Retail Sector
Taking into account the latest GDP data, the services sector has done exceedingly well, thanks majorly to the transport and hotel sectors.
The retail sector has been in limelight with demand normalization and an uptick in sales. The retail sector was undoubtedly the most negatively impacted sector owing to the strict pandemic-triggered lockdowns.
Employing nearly 8 per cent (35 million) of the Indian population, it is set to create 25 million new jobs by 2030, expecting to cross USD 350 billion in Gross Merchandise Value. Further, currently, the organised retail to the total retail market stands at a mere 12 per cent.
The E-commerce trend is also one of the most important factors shaping the retail sector in India.
With the right demand drivers in place for the retail sector in India, investors should not miss adding retail companies to their portfolios. A bet on the retail sector in India is a bet on the consumption story in India.
1. Metals & Mining Industry
Steel production and consumption are regarded as indicators of economic progress and industrial development, the backbone of an emerging economy.
India is the world’s second-largest producer of crude steel, with an abundance of iron ore, manganese ore, bauxite, chromium and other mineral salts as well as deposits of coal, lead, zinc, silver and gold.
Metal and mining sector stocks soared significantly between April 2020 and April 2022 with BSE Metals skyrocketing more than 300 per cent. In May 2022, the government imposed export taxes on a variety of metals and steel production to curtail inflation.
Though Russia-Ukraine created a dent in the metal prices, China’s opening up and softened COVID policy brought hopes for a revival of metal industry pricing and demand.
Under the Atmanirbhar Bharat 3.0 package, a production-linked incentive scheme has been introduced in the speciality steel sector with an emphasis on infrastructure, automotive, power, defence, power and cement sectors. Not only the government but major corporations are making efforts to increase production too.
1. New-age Companies
We never suggest companies which were recently listed in the markets, especially investing in IPOs. But current times ask us to change our approach.
Stocks having good growth, increasing profits and net worth can be kept under the radar to study and watched carefully for investment prospects. The valuations have corrected substantially and companies are reasonably valued.
Recently there has been a lot of news and words about the recent layoffs being held across the globe, especially white and blue-collar jobs.
Though we don’t want to sugarcoat it, the layoffs contain some long-term benefits –
1. Increased Efficiency — Removing redundant positions or underperforming employees — in turn more productive workforce.
2. Cost Savings — Layoffs can help companies reduce their expenses, including salaries, benefits, and other costs.
This frees up resources for companies to invest in other areas of their business, such as R&D, new equipment and technology, or marketing and advertising.
3. Industry Restructuring — More profitable and competitive companies in the long run.
4. Entrepreneurship — Many wonderful companies, like Apple, have started amid widespread layoffs or economic slowdowns
There have been instances where layoffs have had positive effects on the economy –
In the 1980s US Manufacturing Industry, after significant restructuring, a more efficient and competitive manufacturing sector.
After the 2008 Global Financial Crisis, the immediate effects were negative, the crisis spurred businesses and innovation as people sought solutions to economic challenges. The decade which followed was stable both economically and technologically.
The 2020 COVID-19 Pandemic drove mass layoffs, it accelerated towards remote work and e-commerce.
Finally, the newest elephant in the room –
SVB — Silicon Valley Bank
It took 40 years to build the darling of the tech world and just 40 hours of depositors’ distress for collapse. Just to put things in perceptive, it was as big as HDFC Bank before the collapse. Few points to remember -
1. Rising interest rates 8 times a year lead to reduced asset values and inappropriately tally with its liabilities.
2. Even “ZERO” interest rates carry a value. Suddenly the focus has changed while valuing businesses on their financial stability.
3. Not all things West, are the best. The SVB saw the values of its assets eroding fast. Yet it did not adjust the valuations on its books and did not raise adequate liquidity as a comfort.
4. Short-term pain is better. Stringent regulations and laws (as put by RBI) are better than long-term problems (collapse and bankruptcy).
5. Confidence is both the cause and effect in the financial system — Quick actions by financial regulators and the speed of resolution for financial worries are the essence.
6. It’s a mean business — Serious intent, concentrated interest and patient investments. Not a license to hoard.
Coming to the impact on Indian entities –
Nearly $ 2.5 Billion of 600 Indian or Indian-origin entities’ funds were saved by when the Fed backed depositors’ money.
RBI has been active with its prudent approach to the Indian system. It may be slow but is sure-footed.
Financial Institutions are made to be boring businesses with routine operations and high-risk management standards.
These global hiccups are a reminder that our regulators have been quick to act when needed. Monitoring market watch and financial stability wall.
Happy Investing!
Leaving everyone with a thought –
“Your desires would diminish drastically if you didn’t need to impress anyone.”
— Derren Brown
With Respect,
Chandranshu & Priyaanshu
+91–9953726305 & +91–8800967088