Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor , ARN 1390
April, 2024
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Monthly Market Review and OutlookIndian markets underperformed in March despite heavy FPI buying |
• The Nifty index ended 1.6% higher in March, however, it underperformed the MSCI EM and MSCI World which gained 4.3% and 3.0%, respectively. The large cap outperformed the mid and small cap which ended the month in red. The FPIs continue to be net buyers of Indian equities with inflows of INR 351.0 bn as against INR 15.4 bn a month ago.
• On the other hand, we are enthused by the foreign debt flows which continued to increase month on month and remain in a positive territory. With higher tax collections, we expect the flows should be supported by better-than-expected fiscal consolidation targets by the government in the current and next fiscal year.
• Positive outlook on Gold: Maintaining high real interest rates will likely exacerbate the already ballooning US fiscal deficit. Following the seizure of Russian reserve assets, central banks worldwide have ramped up gold purchases. Given these factors, we maintain our positive view on gold.
• We continue to expect the Nifty to trade around a 20x 12-month forward PE ratio. With a March 2026 EPS expectation of INR 1,220, translating to high single-digit returns in FY 2025, we continue to expect front-loaded returns and favor interest rate-sensitive stocks such as real-estate, select financials. Within defensives, we like pharma over FMCG and IT.
• Within the bond market, we recommend adding exposure to longer-duration bonds with a near-term 10-year bond yield expectation of between 7.0% to 7.1%. INR should continue to largely remain stable and resilient due to RBI intervention.
Data as on 31st March 2024, Source: Bloomberg, NSDL
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Indian MacroStaggering March PMI numbers underpins resilience in India's economic growth outlook |
• India's growth outlook on track with a significant increase in aggregate output recorded across both goods producers and service providers as highlighted by the composite PMI number for March 2024 which came in at 61.8. Services PMI recorded its second strongest upturn since June 2010 at 61.2 (only behind 62.30 in July'23) while manufacturing PMI climbed to a 16-year high of 59.1.
• GST collections for March surged to INR 1.78 lakh crore marking the second highest collections since inception only after April 2023 collections of INR 1.87 lakh crores. Additionally, the overall GST collections (net of refunds) for FY24 witnessed a remarkable 13.4% YoY growth and closed at INR 18.01 lakh crores with the average GST collections per month rising to INR 1.68 lakh crores vis a vis previous year's average of INR 1.50 lakh crores. This strong upward trend in GST collections underpins the resilience of the Indian economy especially in a period of peaking interest rates.
• On the inflation front, India's CPI inflation for February 2024 remained unchanged from January at 5.1%. However, core inflation continued to provide comfort with core CPI inflation moderating to 3.4% - 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 food inflation and rising crude oil prices.
• There is some more headroom for the GDP growth in India to surprise on the upside, in our view. As per the government and the RBI, the FY 2024 growth could be closer to 8% and in FY 2025 we expect the elected government will drive further reforms. While consumption is lagging expectations, we expect some improvement from a lower base in FY 2025 supporting overall growth outlook.
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Indian EquitiesMarkets may remain volatile as elections and earnings season draws near |
The Nifty Index recorded a gain of 1.6% in March, while mid-cap. (-0.5%) and small-cap. (-4.4%) indices underperformed the Nifty Index. The FPI inflows remained positive (~USD 3 bn) for the month.
We maintain our overall equity market view, projecting a 20x PE Ratio and FY 2026 EPS of 1220 for the Nifty Index. This translates to high single-digit returns for the year with an anticipation of front-loaded returns.
A large part of the mid and small-caps stocks are trading at stretched valuations in our view (BSE Midcap is trading at a forward P/E of 24.2) and hence, on a risk-adjusted basis, we believe the near-term risk-reward is more favorable for large-caps given their lower volatility
We continue to favor interest rate-sensitive and domestic - focused names such as Real Estate, Banks, NBFCs, and PSUs, while we avoid FMCG and paint companies due to expected increased competition. Within the export market, our preference continues to remain for the pharma sector over IT.
Overall we recommend to have 25% weights in Mid and small caps and 75% weight in large caps. We expect the upcoming budget post the elections will be extremely crucial for sector rotation clues. Currently most of the investment led sectors are trading at unwarranted valuations while consumption related sectors have seen mark de-rating. With employment situation and savings rate faltering, there is an immediate need for the government to address this issue.
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| Domestic Market PerformanceLarge cap outperforms as the Nifty scales new all time high |
Benchmark, Factor Indices & Sectoral Performance
Equity MF Category wise Performance (in %)
Data as on 31st March 2024, Source: Bloomberg
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Domestic Indicator is suggesting that we are gearing towards cautious zone |
Data as on 31st March 2024, Source: Bloomberg
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Mutual FundsMutual fund & SIP flows continue to remain strong |
Assets managed by the Indian MF industry has increased from Rs. 40.7 Tn to Rs. 54.5 Tn in last 12 months with proportionate share of Equity schemes increasing from 51% to 57.4%
SIP flows increased to 19,187 Crs And, overall MF Flows increased to 26,866 Crs in Feb'24 from 21,780 Crs a month ago.
Sectoral / Thematic, Small & Multicap funds continue to witness strong flows
February was a busy month with 20 NFOs across Equity & Hybrid schemes which raised around Rs. ~11,649 Crs
Data as on 31st March 2024, Source: AMFI
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Equity strategy - A SnapshotNeutral on Equities with focus on large cap |
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Recommended Equity Funds' Performances |
Source: MFI Explorer Returns are CAGR as on Apr 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)
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Recommended Equity Funds' Performances |
Source: MFI Explorer Returns are CAGR as on Apr 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)
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Recommended Hybrid Funds' Performances |
Source: MFI Explorer Returns are CAGR as on Apr 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)
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Indian Fixed IncomeLower domestic borrowing numbers in H1 by the Indian government; but Fed rate hike expectations pushed back |
- Globally, fixed-income investors have dialed back on rate cut expectations from the Fed on the back of sustained strength in US economic data and recent upside surprises in US inflation. The market is now anticipating only 65bps of rate cuts in CY24 which is even lower than 75bps derived from the median Fed dot plot.
- Domestically, the much-awaited central government borrowing calendar for H1FY25 served as a second bullish surprise for the bond markets after the lower-than-expected overall borrowing numbers announced by the government in the budget. With a comfortable cash balance, the government plans to borrow only 53% of its total FY25BE in the 1st half which is the lowest since FY19.
- Moreover, the Monetary Policy Committee in its April 2024 meeting kept the policy rates as well as its stance unchanged for the seventh time in a row and also retained its growth and inflation forecasts for FY25. The RBI Governor reiterated that preserving financial stability and promoting a robust system that can support sustainable growth is the primary focus of the regulator. With RBI's comfort on the growth level and the acknowledgment of the last-mile challenge to disinflation, chances of any early pivot to the current status quo remain very unlikely.
- The lower domestic bond supply in H1FY25 coinciding with the bond index inclusion points to a very favorable demand-supply environment. We continue to believe that the domestic bond yields would remain anchored to the current levels and any spike in bond yields owing to global factors could be met by higher demand from investors.
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Fixed Income strategy
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- 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 (Short Term Funds / Banking & PSU / Corporate Bond Funds), target maturity funds (roll down strategies)
- Horizon of more than 3+ years -
- Actively look for 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 Apr 08, 2024 and for Regular Plans with Growth option. Corpus size is as on Mar, 2024.
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Indian ForexStrengthening Dollar index, weakening CNY and rising crude oil puts INR under pressure |
- The INR started the month on a stronger footing opening below 83 levels; however, a firm US Dollar kept the pressure on the INR as the DXY index rose to 104.5 aided by expectations of a delayed start to the Fed's rate cut cycle, and robust GDP growth. Adding to this, the Rising crude oil prices also weighed on the INR as the USD-INR closed the month at 83.4 weakening 0.6% from the previous months closing value of 82.9
- India's forex reserves increased by $140 million to touch its all-time high of $642.631 billion. The previous peak level was recorded in September 2021 when the country's foreign exchange reserves reached $642.453 billion. The reserves took a hit as the central bank deployed the kitty to defend the rupee amid pressures caused majorly by global developments since last year
- We expect USD-INR to be influenced by increasing crude oil prices, robust FPI inflows given the Indian G-Secs' inclusion in the global bond index,, and RBI's FX intervention. While robust capital flows will provide room for appreciation in the INR, we expect the RBI's intervention to cap any significant gains.
- We expect the USD-INR to trade in the range of 83.25-83.50 in the near term range in the near term, with the appreciation bias setting in towards the year-end.
- India's 3QFY24 CAD/GDP remained steady at 1.2% (US$ 10.5 bn) in 3QFY24 with a widening goods trade deficit offset by strong services and remittances flows. With the goods trade deficit expected to be narrower, and strong services surplus and remittances, the INR should continue to remain stable in the near term
- India's forex reserves increased by $140 million to touch its all-time high of $642.631 billion during the week ended March 22. The previous peak level was recorded in September 2021 when the country's foreign exchange reserves reached $642.453 billion. The reserves took a hit as the central bank deployed the kitty to defend the rupee amid pressures caused majorly by global developments since last year
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Global MarketsUS economy remains resilient; China factory activity picks up while woes on real estate continues |
USA - US economy remains strong
• The S&P 500 posted a total return of 3.2% in March, propelled by relatively positive economic data and AI-driven trends. It is now ahead 10.6% year-to-date in 2024 as concerns over a U.S. economic recession have subsided and investors have shifted their attention to the timing of a Federal Reserve pivot from policy tightening to policy easing.• Growth moderated to a still-strong 3.2% pace in the fourth quarter while inflation continued to fall towards the Fed's 2% target, although progress has slowed in recent months. The February Jobs report provided further evidence that the labor market is gradually easing.
• Nonfarm payrolls rose by 275K, beating consensus expectations. That said, other details in the report looked less strong, as downward revisions removed 167K jobs from the prior two months. Overall, moderate job gains and easing inflation should allow the U.S. economy to continue on 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 which may lead to higher volatility.
China - Hopes hinge on better policy support
• Chinese equities ended flattish (CSI 300 index was up 0.6%) in March after a great run in Feb. This has come on the back of Chinese government rolling out policy measures on multiple front & has reflected in macros.• In Mar 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 March with PMI up to 51.1 from 50.9 a month ago, marking fifth 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. The price of secondhand homes in the country's most developed cities fell 6.3% YoY in February marking the worst YoY decline since 2011. US has imposed trade restrictions on multiple sectors citing national security
. • In summary, while glimpses of resilience and potential policy support exist, headwinds still persist. Investors should closely monitor developments in the housing market, policy implementation, and broader economic trends to navigate the intricate path ahead.
Source: Kotak Institutional Equities Report
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| Global Market Performance
Global markets rally in the month of march |
Developed Market Performance
Emerging Market Performance
Source: Bloomberg
Data as on 31st March, 2024
| ▮ | Disclaimer |
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