Equity Market Insights:
The equity markets kind of ensure that there is never a dull quarter!
From April to June 2024, the Indian equity market was highly volatile, mainly due to the Lok Sabha election results and ensuing political developments. On June 4, the election results showed that the ruling BJP did not achieve a majority on its own, although it remained the largest party in a coalition government.
This unexpected result led to a sharp market correction. However, the market began to recover shortly after the initial shock. By mid-June, the Nifty had bounced back from its lows, driven by expectations of a stable coalition government and positive monsoon forecasts, which are vital for the rural economy and consumption sectors. These factors contributed to a 6.78% quarterly gain for the Sensex, which reached fresh all-time highs.
Global developed markets are also riding on a bull. The US S&P 500 index continued to hit record highs, ending the quarter with a 4.12% gain.
Several factors were common between the two markets: robust corporate earnings growth, expected cuts in interest rates and a shift in investor expectations from a valuation-led phase to an earnings-led phase. Additionally, cooling inflation supported the equity markets.
With respect to the sectoral performance in India, BSE Auto posted the highest quarterly gain of 16.88% followed by BSE Reality (+16.61%) and BSE Metal (13.38%). The top two laggards were BSE IT (+3.19%) and BSE Energy (+4.62%).
Although the sharp uninterrupted equity rally over the last few years has emboldened heightened retail participation and speculation leading to excessive valuations in many market segments, there are no signs of bad news that could disrupt this rally. Excessive valuations do not become a reason in itself for market correction but they can cause severe damage to the portfolio on any unexpected negative event which usually ends the bull markets, every time!
Predicting near-term market levels is very challenging, especially with fluctuating expectations for rate cuts adding to the market’s uncertainty. Central bank actions and future policy signals influenced by US election outcomes will be crucial for the rest of the financial year.
The current P/E Multiple of ~24.5x is higher compared to long-term averages of 20-21x. With respect to market cap, value large-cap portfolios are less expensive as they are closer to their historical average. On the other hand, small & midcaps are trading at ~27-30% premium to the historical averages.
Given the high valuations and fuzzy near-term outlook, our ideal strategy is to stick to the asset allocation framework which best suits our risk profile. We continue to maintain our underweight position to equity (check the 3rd page for asset allocation) in large-cap value stocks portfolios while completely exiting mid & small cap funds.
Our tactical allocation to Chinese equities has been bearing fruits despite continued domestic demand challenges and real estate sector issues. We continue to hold 7-10% exposure to Southeast Asian markets due to attractive valuations and improving growth prospects.
Debt Market Insights:
Typically, the debt market is less active than its stock market counterpart. However, this quarter has been different. Finally, it was time for global investors to BOND with the best Indian fixed-income securities.
In June 2024, the Indian bond market saw significant changes, mainly due to the inclusion of Indian government bonds in the JPMorgan Emerging Market Bond Index. This inclusion, starting on June 28, 2024, and spanning ten months, is expected to bring substantial foreign investment into India’s debt market, initially estimated at $25-30 billion, with potential for further growth.
The inclusion is likely to reduce India’s borrowing costs and increase liquidity in the bond market. The yields on Indian government bonds are expected to drop due to higher demand from international investors. Additionally, the influx of foreign capital is expected to strengthen the Indian rupee.
On June 7, 2024, the Reserve Bank of India kept policy interest rates and its monetary stance unchanged for the eighth consecutive review meeting due to concerns about potential food price spikes.
We remain cautious about predicting a decline in inflation and significant interest rate cuts this year.
Strong economic growth in the US and volatile commodity prices due to geopolitical concerns could continue to keep inflation at higher levels, affecting the US FED’s interest rate projections. Any major conflict could disrupt calculations, causing significant losses for holders of long-term debt securities. Therefore, we prefer short to medium-term debt instruments, which offer decent yields and lower interest rate risk, for the debt portion of our asset allocation. Long-term allocations could include debt portfolios with floating rate instruments, while arbitrage funds could be suitable for short-term surplus funds (holding period of up to 1 year) due to their better tax-adjusted returns.
Other Asset Classes:
In the April to June 2024 quarter, gold experienced notable fluctuations and overall gains. Starting the quarter at around $2,277 per troy ounce in early April, the price saw a gradual increase throughout the period, closing at approximately $2,407 per troy ounce by the end of June.
Several factors contributed to this performance. Geopolitical tensions, expected cuts in US interest rates leading to debasement of currency and economic uncertainties bolstered demand for gold as a safe-haven asset. Additionally, central banks, particularly in emerging markets like India, continued to purchase gold.
We continue to maintain a 10-15% allocation to Gold, to hedge against any correction in equity prices, currency depreciation and gain from macro-tailwinds supporting gold up move.
Coming to the real estate sector, the residential housing sales soared to an 11-year peak in the first half of 2024. A recent report highlighted a trend towards premium housing, with the luxury real estate market now making up a significant 41% of total sales across the top eight major markets analyzed in the report.
However, we anticipate that the real estate cycle will reach its peak within the next 1-2 years, leaving limited potential for significant gains from current levels. We project that real estate prices will increase at a rate consistent with inflation over the next five years from their current levels. We do not recommend allocating a significant amount of your assets to real estate at these prices.
Truemind’s Model Portfolio – Current Asset Allocation
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Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
