EF Digest - September 2023

Dear Investors,

August was weak month for global equities as higher US bond yields weighed on the equity markets around the world. The Nifty and Sensex was down 2.5% in August. The broader market however, continued to outperform Nifty. India continued to outperform the emerging markets pack. The MSCI India Index (USD) fell by 1.9%, while MSCI EM Index (USD) was down more than 7%, largely due to underperformance by China. India’s outperformance in emerging market pack led to continued FII flows (nearly Rs 17,800 crores) in August.

Sector rotation (which refers to investors favoring different sectors in different months) continued in August, with Telecom, IT and consumer durables outperforming in August. Infrastructure, capital goods, power and metals also put in impressive performance in August. Oil & Gas and banks were the underperforming sectors. Though Nifty is it at its record high valuation (PE ratio) is lower than its last 10 years average PE ratio, which suggests there is room for further rally. Overall we continue to bullish on Indian equities. Investors should continue to invest in midcaps and small caps through SIPs. You can also take advantage of large corrections by investing in lump sum on dips.

RBI in its monetary policy meeting in August held the repo rate at 6.5%. This is the third consecutive meeting where RBI has not hiked interest rates. The market expects RBI hold the repo rate at 6.5% for the balance of the year and start cutting rates from 2024. The global bond markets are expecting the Fed to make one more 25 bps rate hike in September and then hold rates. However, hopes of early rate cuts have receded due strong labour market data from US.

In the commodity markets, gold remained firm at around 59,000 (per 10 grams) levels while silver gain 1.5%. High bond yields in the US will provide headwinds to gold but this can be a good level for long term investors as the precious metal outperform when bond yields which are at 15 year highs, revert back to mean. The 10 year G-Sec yield in India is at 7.1 – 7.2%. The bond market will be closely following the US Fed’s FOMC meeting in September, especially Fed’s outlook on inflation. In our view, there is no significant downside risk to long duration debt products since bond yields in India have been following RBI policy more closely. 1 – 3 year bond yields are quite attractive at around 7.1%. Investors with 1 – 3 year investment tenures can invest in money market funds and corporate bond funds of high credit quality.

I and my team wish you all a very auspicious and happy Krishna Janmashtami and Ganesh Chaturthi.

Best Wishes,

Ajoy Agarwal,

(Managing Director)