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Investment Strategy

Feb 14, 2024

• The global economic outlook remains cloudy, despite the Fed dropping ‘recession’ from its December projections.
• Magnificent-7 continue to dominate the S&P 500, both in terms of price performance and earnings expectations.
• India’s interim budget maintained its focus on development and inclusion on expected lines.
• The midcap rally is largely attributed to public sector enterprises.
• We suggest adding more duration, as the budget adheres to the fiscal consolidation plan and the expected bond index inclusion.

On Fiscal Consolidation Path

January is traditionally marked by forecasts, and this year was no exception. The US Fed dropping the word ‘recession’ from its December projections found its way into several commentaries. However, the recently published Chief Economists’ outlook by the World Economic Forum conveyed a cloudy economic outlook. The intensifying technological competition and the race to secure supply chains for critical materials and goods are blurring the lines between economic and national security objectives. These heightened protectionist measures are resulting in divergences in growth trajectories. With increased geopolitical tensions in various parts of the globe, this trend is expected to persist over the next few years.

According to the report, 56% of chief economists expect the global economy to weaken over the next year, while a quarter of them anticipate stronger conditions. Additionally, 20% foresee unchanged conditions. The momentum in advanced economies is fading, while emerging economies (excluding China) seem to exhibit resilience. The report warned that growth forecasts remain vulnerable to an increased risk of shocks. Europe particularly is vulnerable to geopolitical risks. Combined with recessionary winds in Germany, the expectations for growth in Europe have further weakened for the year ahead.

Chief Economists’ Expectation for Growth in 2024

Source: Chief Economists Outlook- January 2024 by World Economic Forum

Anticipation of Stagflation Risk by Chief Economists

Source: Chief Economists Outlook- January 2024 by World Economic Forum

After a rocky start to the year, equity markets consolidated in January. US markets continued to be led by the Magnificent 7. The disparity between these seven stocks and the rest of the stocks in the S&P 500 continues to widen. This is not only limited to price but also earnings.

Net Income Growth CAGR

Source: FactSet as of Dec 15, 2023, Neuberger Berman

In recent months, economic weakness has triggered a rally in the US equity markets, driven by rate cut expectations, and vice versa. However, during the FOMC meeting, US Fed chair Powell set the expectation that cuts aren’t on the table for March but are likely to occur in the middle of the year.

Fed Rate Calls by Research Firms

Source: The Wall Street Journal

In China, the economic recovery is progressing much slower than previously expected. Debt cycles generally take longer to resolve, and China is undergoing a severe debt reset. Last month, we wrote about how Chinese stock were cheap and got cheaper as international sentiment continues to be adverse. The sell-off intensified further over the past few weeks, despite efforts by the regulator to curb short selling.

It’s worth noting that the Nikkei, the Japanese index, surpassed 36,000 levels after 34 years! Japan Inc.’s greater willingness to adopt shareholder friendly policies, a more stable dollar-yen exchange rate, and hopes of Japan emerging out of the deflationary spiral powered the rally.

India Update and Outlook

India announced it vote-on-account budget on 1 st February. One the one hand, no significant announcements were expected as this was just an interim budget; on the other, some had apprehensions that in the run-up to elections, there could be some populist measures. The budget focused on continued themes of development and inclusion on expected lines. The positive surprise was the fiscal prudence. The interim budget proposed a prudent 5.1% fiscal deficit target for FY25 and reiterated a target of 4.5% for FY26. The revised fiscal deficit estimate for the current year (23-24) is now at 5.8% against the budgeted estimate of 5.9%, well below the FY23 figure of 6.4%.

India on Fiscal Consolidation Glide Path

Source: Budget Documents, Sanctum Wealth

India’s economic resilience continues to reflect in direct tax and GST numbers. Last month, India reported its second-highest monthly gross GST collections at over Rs 1.7 lakh crores. Gross direct tax collections are up a whopping 24.6% year-over-year. The latest S&P Global India Services PMI reading at 59.0 was the strongest since September 2023. Other indicators such as fuel consumption, air traffic, unemployment rate, and credit growth continue to support the resilient India hypothesis. However, India’s deep integration with the global economy means it cannot be completely insulated from a global slowdown. Nevertheless, the country possesses enough domestic sources of growth to potentially outpace other large economies, even in the event of a slowdown.

Markets respond to earnings relative to expectations. Earnings season is underway and thus far has been a mixed bag. At the time of writing, 43 Nifty stocks have reported earnings. Consumer companies, with a few exceptions such as jewellery, paints, and hospitality, have posted subdued numbers. Financials are showing resilient credit growth, although some players are experiencing pressure on net interest margins. For FY25, earnings per share (EPS) are anticipated to grow by approximately 16%. We will provide a more detailed update next month.

Equity markets were not enthused by the early result trends and combined with sustained FII selling ended flat for January. We expect higher volatility in the run up to elections.

Over the last few weeks, we have been digging into the underperformance of midcap mutual funds relative to the midcap index. We observe that lower exposure to public sector companies, and certain companies from the Adani group, has been a key factor contributing to this underperformance. Public sector enterprises have experienced significant rerating and, consequently, a remarkable rally. Some argue that many of these companies are currently overvalued relative to their fundamentals. Nevertheless, many of these companies did not pass through the filters for growth, capital allocation, etc., and therefore were not included in mutual fund portfolios. The tables below illustrate the contribution of these companies to the index return and the exposure of midcap funds to the same:

Public Sector Enterprises Have Led Midcap Rally in Last Few Months

Source: Morningstar, Sanctum Wealth. Data as of 31 st January 2024

Source: Morningstar, Sanctum Wealth. Data as of 31 st January 2024

We think this underperformance of mid-cap funds is an anomaly. Many mid and small-cap stocks are under-researched and hence offer information asymmetry that can be exploited to deliver alpha. This however is subject to prudent manager selection.


We have maintained a marginal overweight in equity but trimmed mid-cap weights a while ago. We may have been early in our actions, but we aim to deliver superior risk-adjusted returns and always tend to exercise prudence. We would use upswings in the markets to rebalance our portfolios further.

With the budget keeping the economy on the path of fiscal consolidation and expected inclusion in the bond index we want to build some more exposure to duration. We were very gradual in our stance, which has held us in good stead. Considering liquidity in the SDL segment has yet to be tested since the massive inflows in target maturity funds in Q1 CY 2023, we prefer doing this through purely G-Sec linked target maturity funds over funds with SDL exposure.

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