Equity monthly view for September 2022

The S&P BSE SENSEX declined by 3.5% on a total return basis in the month of Sep 2022 while S&P BSE Midcap Index & S&P BSE Small cap Index declined by 2.1% and 0.6% respectively. Most of the sectoral indices too had a similar trend with S&P BSE India Power, S&P BSE Oil & Gas, and S&P BSE Realty indices emerging as the top losers with a decline of ~8-9% each. Hike in taxes on domestically produced crude, fuel exports, and rising gas costs were the key triggers for correction in the Oil & Gas sector. Declining home affordability due to rising interest rates was a sentiment dampener for the real estate space. Meanwhile, defensive sectors like FMCG, Healthcare, and Telecommunication saw marginal gains of 1.4% each.

The declining trend in global markets continued amidst fears pertaining to multi-decadal high inflation and aggressive monetary tightening by global central banks. Developed market indices like S&P 500 and Dow Jones Industrial Average Index declined by 9.2% and 8.8% respectively. Global risk-off sentiment was reflected in emerging market indices as well with the MSCI Emerging Market Index correcting by 11.7%.

Amidst this setting, FPIs turned sellers in September and sold Indian equities to the tune of USD 903 mn. Domestic institutional investors counterbalanced the outflows and turned buyers with purchases worth USD 1.6 bn. Since the start of the calendar year 2022, FPIs have recorded a net outflow of USD 22.3 bn while DIIs recorded a net inflow of USD 32.5 bn.

Quantum Long Term Equity Value Fund (QLTEVF) saw a decline of 2.9% in its NAV in the month of Sep 2022. This compares to a 3.2% decline in its Tier I benchmark S&P BSE 500 and a 3.5% decline in its Tier II Benchmark S&P BSE 200. Telecom and pharma sector were the major contributors to the outperformance. Cash in the scheme stood at approximately 7.4% at the end of the month. The portfolio is valued at 12.5x FY24E consensus earnings vs. the S&P BSE Sensex valuations of 18.2x FY24E consensus earnings.

In India, macro indicators are reasonably placed despite global uncertainties. GST collections remained above INR 1.4 trillion for the 7th consecutive month. The Manufacturing Purchasing Manager’s Index, published by S & P Global, remained in expansion territory at 55.1 (A reading above 50 indicates expansion) for September. A robust addition in jobs is reflected in the reduction of the unemployment rate across urban and rural areas. Business updates published by leading banks for the September quarter indicate a healthy loan growth trend.

In its scheduled policy meeting in September, the US Fed reiterated its resolve to bring inflation back to the target range of 2%. It hiked the interest rates by 75bps taking the fed funds rate to a range of 3%-3.25%, the highest since early 2008. This was at a time when US inflation remained substantially higher than its target range at 8.3% as of Aug. Persistent high inflation is likely to force the US Fed to take further rate hikes during the upcoming policy meetings. At home, RBI hiked the repo rate by 50 bps to 5.9%. RBI estimates CPI inflation at 6.7% in FY23 against its target range of 4-6%. Though we could see a spill over effect of further interest rate hikes by global central banks in India, moderate inflation will help the RBI to slower the pace of rate hikes. Moderation in global growth could further soften commodity prices giving a respite to inflation.

Key factors that could shape the trajectory of Indian markets in the near term are:

• Oil price trend as India imports 85% of its crude requirements

• Private Capex trajectory since the capacity utilization has surpassed 75% (Source: RBI Survey)

• Commodity prices post normalization of the Chinese economy

• Festive demand trends (This is the first festive season without covid restrictions)

We expect the performance of portfolio companies to be reasonable as the linkage to the global economy is minimal for the majority of our investee companies. Banking, Auto and IT together account for ~69% of the portfolio as of September. Banks continue to depict cyclical low credit costs along with robust credit growth. Auto companies are seeing record high unit realisation coupled with supply chain normalisation and easing of input prices. The IT sector would benefit from the increasing relevance of technology across the globe and by having access to a large pool of engineering talent at a competitive cost.

The valuation premium of India compared to global peers is likely to persist given the stable domestic policies, favourable demographic dividend, and long-term growth potential. The valuation of Indian markets indicated by the P/E (Price to Earnings) ratio of benchmark indices is marginally higher than its historic average, supported by a stable earnings trajectory. Nevertheless, we could see volatility in the near term due to uncertain global macros. Past experience shows us that such periods of volatility present good opportunities for patient long-term investors. We urge investors to continue investing in equities in a staggered manner through SIPs with a long-term view.

Name of the Scheme	This product is suitable for investors who are seeking*	Risk-o-meter of Scheme	Riskometer of Tier I Benchmark	Riskometer of Tier II Benchmark
Quantum Long Term Equity Value Fund (An Open Ended Equity Scheme following a Value Investment Strategy) Tier I Benchmark: S&P BSE 500 TRI	• 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.
The Risk Level of the Scheme in scheme Risk O Meter is basis it's portfolio as on Sep 30, 2022.
The Risk Level of the Tier I Benchmark & Tier II Benchmark in the Risk O Meter is basis it's constituents as on Sep 30, 2022.

Above article is authored by Quantum.

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