Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor , ARN 1390

May, 2024

Monthly Market Review and Outlook

Broader markets rally as the focus shifts to earnings and general elections in India

• The Nifty index scaled a new all-time high in April, as it continued its gaining streak for 3rd month in a row ending the month at 1.2% higher even as the global indices turned negative with MSCI EM and MSCI World ending -2.5% and -3.8% lower respectively. The broader markets rebounded strongly from March lows with mid and small-cap surging 6.3% and 10.5% respectively in April.

• FPI turned sellers in both the equity and debt markets with net outflows of INR 86 bn and INR 109.5 bn, respectively. The debt markets saw a net outflow for the first time since March 2023 as the US treasury yields rose on the back of an expected delay in fed rate cut

• A large part of the mid and small-caps stocks are trading at stretched valuations in our view (Nifty Midcap 100 is trading at a forward P/E of 31.1 as against 10-year average of 21.3). Hence, our investment committee continues to prefer large-caps over mid and small caps with 75:25 allocation.

• Within the bond market, we believe adding exposure to longer-duration bonds with a near-term 10-year bond yield expectation of between 7.1% to 7.2%. INR should continue to largely remain stable and resilient due to RBI intervention.

Data as on 30th April 2024, Source: Bloomberg, NSDL

Indian Macro

Services PMI at a 14 year high coupled with moderating inflation augurs well for the Indian economy

• India's services activity growth moderated a bit in April but still experienced its highest level in the last 14 years amidst favorable economic conditions and strong demand. The seasonally adjusted HSBC India Services Business Activity Index fell from 61.2 in March to 60.8 in April, highlighting one of the strongest growth rates seen in just under 14 years. Similarly, the composite PMI output index also slid to 61.5 in April from an eight-month high of 61.8 in the previous month.

• GST collections for April reached a record high of INR 2.10 lakh crores driven mainly by higher domestic transactions. This robust GST collection coupled with a consistent growth in these numbers highlights that the Indian economy is on a fast track to formalization, and underpins resilience in the growth outlook for the country.

• On the inflation front, India's CPI inflation for March eased to 4.85%. Encouragingly, core inflation also tapered to a low of 3.2% - the lowest in more than four years. While we believe inflation is expected to continue moderating in the near term, upside risks remain largely from (1) the high temperatures causing volatile food inflation, (2) geopolitical risks and ongoing OPEC+ supply cuts pushing up crude oil prices, and (3) higher non-energy commodity prices.

• We continue to remain constructive on India's GDP growth outlook and believe that there is still some headroom for upward surprises. If the incumbent government retains power with simple majority, the reform momentum could continue helping overall India's macro recovery.

Indian Equities

Markets may remain volatile as elections and earnings season draws near

The Nifty Index recorded a gain of 1.2% in April, while broader markets surged with mid-cap. (6.3%) and small-cap. (10.5%) outperforming the Nifty Index. The FPI inflows turned negative ($3 bn) for the month.

In terms of the sectors, we cut our negative view on IT and believe the sector valuation now correctly reflects the ongoing challenges. Near-term outperformance is possible; however sustained rally looks unlikely as the sector dynamics remain challenging and the recovery in operating performance is till sometime away.

On the other hand, the recent commentary from the FMCG companies have been positive with a view that the rural demand is picking up. After significant consolidation and underperformance, we expect the sector could remain in favor due to its' defensive appeal.

Within financials, we remain constructive however the outlook has been weakening and hence we believe booking some profits in the PSU banks could be beneficial. The sector is experiencing regulatory policy tightening which may hurt valuations. The recent draft regulation by the RBI on project financing , if implemented, could also hurt infra and capital goods companies, in our view.

Overall we continue to believe the Indian equity market to deliver low double digit returns in the current financial year and after the positive performance YTD, we maintain our buy-on-dip strategy with preference on large-caps over mid-small caps with 75:25 weights.


Domestic Market Performance

Broader markets outshines as nifty continues its 3 month gaining streak

Benchmark, Factor Indices & Sectoral Performance

Equity MF Category wise Performance (in %)

Data as on 30th April 2024, Source: Bloomberg

Domestic Indicator is suggesting that we are gearing towards cautious zone

Data as on 30th April 2024, Source: Bloomberg

Mutual Funds

Mutual fund & SIP flows continue to remain strong

Assets managed by the Indian MF industry has increased from Rs. 40.1 Tn to Rs. 55 Tn in last 12 months with proportionate share of Equity schemes increasing from 51% to 57.8%

SIP flows increased to 19,271 Crs And, overall MF Flows reduced to 22,633 Crs in Feb'24 from 26,866 Crs a month ago.

Sectoral / Thematic, Large & Midcap funds continue to witness strong flows

March was a busy month with 17 NFOs across Equity & Hybrid schemes which raised around Rs. ~3,718 Crs

Data as on 30th April 2024, Source: AMFI

Equity strategy - A Snapshot

Neutral on Equities with focus on large cap

Recommended Equity Funds' Performances

Source: MFI Explorer Returns are CAGR as on May 08, 2024 and for Regular Plans with Growth option. Corpus size is as on Mar, 2024. **NFO Strategies: Funds recommended since New Fund Offer (NFO)

Recommended Equity Funds' Performances

Source: MFI Explorer Returns are CAGR as on May 08, 2024 and for Regular Plans with Growth option. Corpus size is as on Mar, 2024. **NFO Strategies: Funds recommended since New Fund Offer (NFO)

Recommended Hybrid Funds' Performances

Source: MFI Explorer Returns are CAGR as on May 08, 2024 and for Regular Plans with Growth option. Corpus size is as on Mar, 2024. **NFO Strategies: Funds recommended since New Fund Offer (NFO)

Indian Fixed Income

FPI debt inflows turns negative for the 1st time in April 2024 since G-Sec inclusion in bond indices

  • US Federal Reserve left the benchmark rates unchanged at 5.25% - 5.50% for the sixth consecutive meeting since July 2023 as there was not much progress towards the 2% inflation target. However, the Fed still maintained its' plan to cut rates this year with markets continuing to price in around 2 rate cuts in the second half of 2024.
  • Domestically, the minutes of the April MPC meeting reiterated the commitment to align headline inflation to the 4% target on a durable basis. There were some concerns raised by a couple of MPC members on the current real policy rate of over 2% being quite restrictive for economic growth. We retain our view of a change in policy stance and rate cuts starting in 3Q FY2025.
  • Owing to the repricing of global rate cut expectations and higher treasury yields in the US, there have been some direct consequences on incremental FPI debt flows with April witnessing an overall net outflow of around USD 1.80 bn. This contrasts with net inflows of more than USD 6.29 bn in Q1 of CY24. While we believe US treasury yields can remain elevated for some time with potential pushback on the extent of rate cuts in CY24, last month's blip in FPI flows could be seen as temporary with the demand-supply equation for Indian G-Secs evenly balanced.
  • The system liquidity had primarily remained in deficit for FY24 which pushed up the money market yields leading to a flat sovereign yield curve throughout the financial year. The recently announced buyback of G-Secs and the scheduled transfer of RBI dividends expected to come next month could improve the liquidity conditions in the near term.

Fixed Income strategy

Focus on carry + Add Duration as and when there are any spikes in yield

  • Amid the rising global uncertainty, domestic macros continued to remain resilient. Terminal Repo Rate now expected to peak at 6.5%.
  • Current environment pointing to peaking inflation & policy rates globally, robust domestic growth & policy continuity in the country seems quite favourable for debt investments. Any spike in yields could be utilised for building up of portfolio allocation to duration play.
  • Going forward, short term investors can prefer products in line or slightly longer than their investment horizon to lock in higher accruals. Following is preferred strategy
    • For investment horizon upto 12 months: Prefer allocation to arbitrage funds, ultra short term/ money market funds
    • For investment horizon of 1-3 years: Active funds (STF/BPSU/CBFs), target maturity funds (roll down strategies)
    • Horizon of more than 3+ years -
      • Prefer deployment in duration focused products in case of spike in yields through MFs
      • Selective Equity Savings Fund, a mutual fund scheme, can be preferred as an alternative option as it has the potential to provide better post tax risk reward
      • Selective Multi Asset Funds following a conservative bias towards allocation can also be considered

Recommended Debt Funds' Performances

Source: MFI Explorer. Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Returns as on May 08, 2024 and for Regular Plans with Growth option. Corpus size is as on Mar, 2024.

Indian Forex

India trade deficit improves even as INR remains under pressure due to ongoing geopolitical uncertainty

  • The INR hit an all-time low of 83.58 amid ongoing geopolitical conflicts and a rising US dollar index on the back of a delay in fed rate cut. However, the INR got some respite in the last week as the DXY index was on a steady downtrend last week with INR closing the month at 83.46.
  • India's trade deficit significantly improved in FY 2023-24 standing at USD 78.12 bn, down by 35.8% from USD 121.62 billion a year ago. India's forex reserves declined for 3rd consecutive week after hitting an all-time high of USD 648 bn ending the 26th April week at USD637.9 bn. The reserves are sufficient to cover 11 months of projected imports as per the ministry of Finance
  • The share of crude petroleum imported from Russia surged to around 36% in the 11 months of the fiscal year 2024 from a mere 2% in the fiscal year 2022. This has led to savings of around USD 13 bn in the past two years, helping compress the current account deficit CAD/GDP ratio by 15-22 bps in FY2023-24.
  • The stability of the INR, with historically low volatility, is indeed noteworthy. We anticipate that the INR may depreciate at a significantly reduced rate of approximately 2% over the coming years, in contrast to the average depreciation of around 3.9% observed over the past two decades. In the near term we expect the USD-INR to trade in the range of 83.25-83.75

Global Markets

US inflation decline slows; China factory activity picks up while woes on real estate continues

USA - US economy remains strong

• The S&P 500 & Nasdaq 100 corrected by 4.2% and 4.5% respectively in April, on account of stalling progress on disinflation which could delay rate cuts, presenting challenges to both stocks and bonds.

• Growth moderated to a 1.6% pace in the 1Q24, falling short of expectations for 2.5% growth. The March CPI report came in stronger than expected with headline CPI rising 3.5% YoY bucking the trend of cooling off towards Fed's 2% target. The decline in inflation has been very slow, tempering market expectations for rate cuts this year

• The March Jobs report showed a very strong labor market, but not an inflationary one. Nonfarm payrolls rose by 303K, beating consensus expectations. Overall, strong labor supply gains, mainly fueled by immigration and moderating wage growth should allow the U.S. economy to continue a soft-landing path.

• We continue with a constructive stance on US equities and is the only recommended market from a global perspective. That said, as cyclical tailwinds fade and the U.S. election approaches, there are still plenty of risks to economic stability. Also, elevated valuations in some parts of the market may lead to volatility and market corrections.

China - Hopes hinge on better policy support

• Chinese equities continued their upward run in 2024 with CSI 300 index up by 1.9% in April. This has come on the back of Chinese government rolling out policy measures on multiple front & has reflected in macros.

• In April 2024, China's services PMI increased to 52.7 from 52.5 in Feb, due to accelerated new order growth & demand improvement. China's manufacturing activity picked up in April with PMI up to 51.4 from 51.1 month ago, marking sixth straight month of growth in factory activity.

• However, we see this as a temporary bounce given limited headroom for further stimulus due to debt, deflation, and demographic challenges. China's real estate market continues its woes as Chinese private developers face a USD 553 billion funding gap to complete pre-sold homes. In April, authorities in Europe took a round of new actions against Chinese companies. Protectionist measures against China is on the rise in the US, Eurozone & few EMs

• In summary, while glimpses of resilience and potential policy support exist, headwinds persist. China still has plenty of economic slack, with urban employment and industrial capacity utilization low and the property crisis unresolved, in our view.

Source: Bloomberg

Global Market Performance

India and China continue gaining streak as the developed markets turn red

Developed Market Performance

Emerging Market Performance

Source: Bloomberg
Data as on 30th April, 2024


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Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor, ARN 1390