From The Fund Manager's Desk - Resilience and Opportunities

Markets in a Nutshell

Last week, Indian equities faced some pressure. Most of this decline came in on Friday, thanks to the anxiety around a jobs report in the US, and a report by Goldman Sachs which highlighted an unfavourable risk-reward for PSU banks.

• Nifty witnessed a decline of 1.5% over the past week's closing

• Bank Nifty witnessed a decline of 1.5%

• Nifty Midcap 100 index is down 1.3%

We expect Indian equities to remain range-bound unless the 25,000 mark on Nifty is crossed. At current levels, indices are probably going to continue witnessing some selling pressure. Amid this, investors would be better off avoiding speculation-based trades, especially options trading.

Index	August 28, 2024	September 6, 2024	% Change
Nifty	25,236	24,852	-1.52
Bank Nifty	51,351	50,576	-1.51
Midcap Nifty	59,287	58,502	-1.32

The Resilience of the Indian Markets

Last week was volatile for the global markets, and India was no exception. However, the resilience of the Indian markets resulted in Indian equities seeing a delayed decline, compared to the rest of the world.

The benchmark indices closed in the green for 14 consecutive sessions—the last time this happened was October 2007. What further highlights the resilience is that this happened despite weakness in global markets.

The thing about the Indian markets being resilient is that it isn’t recent. In fact, for the last 12 years, the Indian markets have largely been positive.

• Since August 2020, the Nifty 50 has witnessed 53 consecutive months without a decline of more than 5%

• From August 2016 to August 2018, there were 31 consecutive months without a decline of more than 5%, and

• From August 2012 to August 2015, there were 38 consecutive months without a decline of more than 5%

The problem with so much positivity is that new investors have not really experienced a real bear phase. And India being a market where most of its equity participants are new, the general feeling is that the current scenario can prevail indefinitely.

But the fact remains that things can change in the blink of an eye. Despite the general optimism around, there is a section that feels the valuations are a bit stretched. We are, in fact, often bombarded with queries around whether the market is at its top, and when and how much it will fall.

Our answer to these questions is simple – no one knows until it actually happens. Predicting the index level is pointless. You’d rather spend your time focusing on opportunities, which help you stay ahead of the curve.

Focus on Opportunities

One such opportunity, which we’ve been chuffed by, and investors can consider is that of exports. This may surprise some of you due to the current nature of the export market, so let me explain why you should look into it.

1. Exports are key economic drivers, and we’ve seen how exports have played an important part in China’s growth since 1990. Similarly, smaller economies like Thailand and Vietnam’s GDPs are correlated to the growth of exports

2. India has an ambitious target of hitting US$ 2 trillion in exports by 2030. With the value of exports at US$ 783 billion as of 2023, we are talking about a 2.5x growth opportunity over just 5 years

3. India is currently a net importer, and ramping up on exports is the most feasible way for it to shield itself from external shocks (like a few of neighbors are facing), improve foreign exchange stability, and even promote innovation

The ball already seems to have been in motion. From 2005 to 2023, India clocked an 11% CAGR on exports, which is just behind Singapore in first place and Ireland at second.

However, with India, thanks to our past, one relates exports to the sectors of software, pharmaceuticals, and textiles. However, opportunities are emerging in several sectors like Chemicals, Industrial Machinery, and the Electrical & Electronics segments.

Sector	US$ billion	Expected 5-year CAGR (%)
Electrical & Electronics	120 - 145	35-40
Chemicals	110- 130	19-22
Textile & Apparel	95 - 110	13-16
Industrial Machinery	70 - 75	18-20
Automotive	45 - 55	15-18
Pharmaceuticals	45 - 50	16-18

What could drive growth?

1. Labor leadership - An added advantage now is that skill sets matter, not just cost. Policy has been aligning itself to promote both skills and private-sector hiring

2. China + 1 - Diversification in the global supply chain has been happening in the chemical sector and is likely to happen in other sectors as well

3. Value addition - Indian companies have been moving up the value chain, focusing on more critical solutions rather than just taking advantage of cost disparity

4. Fiscal support - Support from government policies, reforms, and incentives are likely to provide a much-need impetus to the entire sector

At Paterson PMS, we’ve been peddling hard on the export opportunity, and have exposure to several interesting names across the sectors of automotive components, defense, electrical and electronics, pharmaceutical, and software.