Equity Monthly View for July 2023

The S&P BSE Sensex rose by 2.8% in the month of July, supported by corporate earnings and strong flows. S&P BSE Midcap Index & S&P BSE Small cap Index increased by 5.8% and 7.5% respectively. Almost all major sectors were positive with Realty, Utilities, Capital goods, Metals, Healthcare and Telecom leading the index. The results reported so far, point to margin recovery driven by moderating input prices in most of the consumption-oriented themes. Technology, Banks, FMCG and Consumer durables were the laggards in the month gone by. Most of the economic activity indicators remained strong; GST collection improved to Rs 1.65 trillion (+11% yoy), PMI Services/manufacturing witnessed improvement, other indicators such as credit growth, E-way bill growth and power generation remained resilient. Monsoons are progressing well though there are some disruptions in certain parts of the country and CPI inflation print is expected to be above 6% in July driven by food inflation; these can have a bearing on near term policy rate trajectory.

US FOMC, in line with market expectations, hiked interest rate by 25bps in July; the labour market continues to remain tight in the US, though the inflation trajectory is moderating. Global markets did well during the month, with hopes of soft landing for the developed nations and broader technology rally. S&P 500 advanced by 3.2%, the broader MSCI EM index rose by 6.2% and MSCI World Index rose 3.3%; India trailed some of the EM peers.

In terms of flows, FPI flows were positive for the fifth successive month with inflows of USD 4.2bn. Domestic institutional investors were sellers to the tune of USD 0.3 bn. Valuation within the large cap bucket remain marginally higher than long term average whereas valuation within mid/small caps remains elevated given the sharp rally in the past few months. The domestic flows have been particularly strong in the Mid/Small category in the past several months; constituting over 42% of total flows YTD. Hence some caution is warranted within this bucket.

Quantum Long Term Equity Value Fund (QLTEVF) saw an increase of 4.5% in its NAV in the month of July 2023; Tier-I benchmark S&P BSE 500 and Tier-II Benchmark S&P BSE 200 advanced by 3.9% and 3.5% respectively. Our allocation to Healthcare, Utilities and Financials helped in outperformance w.r.t benchmark. Financials which include Banks and NBFCs continue to witness favourable credit demand along with reasonable asset quality. Price stability in US market coupled with green shoots from product pipeline translated to positive performance for Pharma sector. Outperformance from Utilities segment was contributed by a power generation company, which would benefit from healthy capacity addition across conventional thermal and renewable sources. In terms of portfolio characteristics, cash in the scheme stood at approximately 6.4% at the end of the month. The portfolio is valued at 13.5x consensus earnings vs. the S&P BSE Sensex valuations of 18.1x based on FY25E consensus earnings; thus, displaying value characteristics.

A Mixed Result season so far!

• IT sector results were weak; some of the midcap and ER&D IT companies outperformed the larger peers. Forward looking TCV (Total Contract Value) trajectory remain stable and management commentary is subdued, highlighting the pause in discretionary spends and slow decision making by clients. While next few quarters can be challenging, if one were to have a longer-term view; we are hopeful of demand recovering. As in the past cycles, Indian IT vendors typically end up capturing higher global market share in a downcycle and are currently trading at compelling valuations with attractive FCF yields.
• Credit growth remained strong for most of the Banks/NBFCs. Along the expected lines, NIMs have started normalising post stellar FY23, where asset repricing was quite sharp. Most of the private banks continue to be very well capitalised and asset quality across segments remains benign. Credit cost can cyclically move up but will be within comfortable range, with no major risk markers turning adverse. We believe banks are quite attractively placed on growth, profitability, and valuations over the medium term hence remain overweight position for us.
• Pharma companies have seen improvement in pricing environment in US markets; pipeline of launches also looks quite attractive. After a period of underperformance pharma sector seems to have turned the corner.
• Margins have improved across consumption-oriented themes, mainly due to input cost moderation. There are some early signs of Rural demand recovery as inflation moderates, whereas urban consumption has remained strong. 2 wheeler volumes have improved on low base, exports volumes are still subdued. Real Estate continues to witness traction as affordability has improved in major cities with unsold inventories declining. Pockets within Infra, building materials have done well on the back of Government capex.

Near term risks in our view are overall inflation trajectory, global slowdown, and political uncertainty as the country heads into elections next year. To conclude, our portfolio is well positioned to benefit from cyclical economic upcycle over the medium term with major overweights being Financials and Autos. While there could be uncertainty emerging globally or in India; investors should not be unnerved by the near-term volatility and focus on allocating prudently to equities based on their financial goals. Any sharp correction due to near-term headwinds can offer additional valuation comfort and should be used to allocate more to equities with a long-term perspective.

Data source: Bloomberg

Name of the Scheme	This product is suitable for investors who are seeking*	Risk-o-meter of Scheme
Quantum Long Term Equity Value Fund An Open Ended Equity Scheme following a Value Investment Strategy.	• Long term capital appreciation • Invests primarily in equity and equity related securities of companies in S&P BSE 200 index	Investors understand that their principal will be at Very High Risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Above article is authored by Quantum.

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