Market outlook: 3 Jun 2024

Before we start this month newsletter, let us remember one of the pioneers in Quant investing, James Harris Simons (PHD in mathematics), founder of Renaissance Technologies. He has outperformed markets over three decades generating over 60% returns consistently. The popular statistic floating around is that $1000 investment in 1988 in his signature Medallion fund (open to owners and employees only) would be $42 million today as compared to $40000 in S&P 500. Today Renaissance manages $106 bn, and estimated net worth of Simons is $31bn. Thanks to him and others (who follow Quant based Investments), these strategies drive almost a third of Wall Street trading operations today.

Since Covid -19, Indian markets witnessed a smart rally with Indices posting hefty gains. Equity as an asset class have beaten all other asset classes by a wide margin. But of late, Indices has been consolidating and sentiment has turned from extreme greed to fear, due to various factors including election outcome, earnings momentum, continued selling by FIIs.

Though recent quarterly results are of a mixed trend. Banking and Financials has shown marked improvement in their earnings, but there is a clear sign of pressure on margins across sectors. Post election results, investors should focus on bottom-up growth stories and allocate capital accordingly.

Investors should not lose their focus and concentrate on identifying the right businesses with future earnings growth. The big picture is really very attractive for India. India has grown well over 30 years at around 6.5% p.a. But yet the market has been small in global terms. In 2000 India was less than 1.5% of global GDP, today it has inched up to 3.4% but by 2030 it is likely to be 5%. But the key point is that India is starting to drive the global GDP growth and add as much to it as all of Europe, and half as much as the USA.

India has always traded at a premium valuation as compared its Asian peers in the past due to its strong economic potential. Active management of portfolio allows fund manager to avoid parts of the market where valuations are stretched and focus instead on mispriced opportunities.

Recently, S&P Global has raised the outlook on India’s credit rating to “positive” from “stable” while affirming its rating of BBB minus. It cited robust economic growth and improved expenditure quality for the move, which puts India’s sovereign rating in the reckoning for an upgrade. A positive outlook implies better odds of the rating moving up than down. While India’s macro numbers broadly seem to be moving in the right direction, government officials have long complained of a raw deal from global rating agencies. Independent India has never defaulted on debt repayments. This partly underpins global demand for Indian sovereign bonds that are open to foreign investors. Inflows from abroad into these are expected to surge once they’re included in marquee global indices.

Of course, there are risks to monitor. While investors appear to expect a Modi win, markets could be surprised if the margin of victory were to be lower than anticipated. A further heightening of political polarization could reduce the attractiveness of India as an investor destination while any spike in geopolitical turbulence could drive up commodity prices and inflation generally, slowing India’s development efforts.

However, we believe that India’s growth cycle is resilient, and long-term-oriented stock pickers that can balance valuation concerns with growth convictions could see outperformance.