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Think of navigating a river—sometimes the water is calm and steady, other times it’s turbulent, but at the end, there’s a rewarding view. That’s exactly what we’ve seen in India’s financial markets in the quarter ending September 2024. It’s been a mix of strength and growth, even as global uncertainty ripples through.
Here is what’s happening currently-
Stock markets are rising
Bond Prices are increasing / Bond Yields are falling
Gold is trending upwards
Real Estate Prices are inching upwards
ALL KEY ASSET PRICES ARE GOING NORTHWARDS!
In our opinion, two big factors contribute to this strong trend
- India’s “Goldilocks” Economy: Right now, India is in a sweet spot, with steady GDP growth and inflation under control. We call this the “investment-consumption-disinflation” effect—strong investment and consumer spending are driving growth, while inflation is gradually easing.
- The U.S. Fed’s Aggressive Rate Cut: The unexpected rate cut by the U.S. Federal Reserve lowered U.S. yields, making India and other emerging markets more attractive to foreign investors.
While inflation has cooled off recently there is a potential issue building up – the situation of excess liquidity. The U.S. has been printing more money in recent years, and since international trade is largely conducted in U.S. dollars, this excess money circulates globally. With the rate cut last September and more expected in the near future, liquidity could get a further boost over the next 2-3 years.
What does this mean for India? Likely, we’ll see more foreign funds flowing into Indian markets. Combined with India’s own economic strength and lower interest rates, asset prices—stocks, real estate, gold—could rise even further.
But so will inflation! This is the moot point we want to highlight. When people have more money in hand and interest rates are low, consumer spending goes up, pushing up the prices of goods and services.
The key takeaway here is that we need to stay mindful of this inflation cycle and make smart investment choices that can outpace inflation in the long run. That’s how we’ll build, preserve, and grow wealth. Our strategy of building a portfolio with diversification across asset classes and geographies is right on track to handle this.
Of course, we should also always be cautious. The assumption that asset prices will keep rising can quickly be challenged by things like escalating geopolitical tensions, a U.S. recession, slowing global demand, or even market panic driven by herd mentality. This is where our disciplined dynamic asset allocation approach will really shine, keeping us steady through any rough waters ahead.
Equity Market Insights:
The Indian stock market had another great run in the second quarter of FY 2024. The BSE Sensex went up by 7.67% during the quarter and by the end of September, it was up almost 17% for the year—just shy of beating last year’s full-year gain of 18.74%. What’s driving this? Well, as mentioned in our top factors, a lot of it comes down to Foreign Portfolio Investors (FPIs) putting more money into the market, especially after the U.S. Federal Reserve cut rates in mid-September.
If we look at which sectors did well, the one underlying theme in the gainers was the predominance of consumer plays – BSE FMCG (+15.24%), BSE Consumer Durables (+14.5%) and BSE Auto (+8.19%). The tech sector, too, was a star with BSE IT returning 13.71%. On the flip side, real estate and banking didn’t quite keep pace, only rising around 1-2%.
In the US equity market, September has been the weakest month historically. The popular ‘September Effect’ failed to materialize this year as the S&P 500 advanced 2% to clench its best September since 2013. The enthusiasm was of course born from the US rate cut decision. For the full quarter, the index was up by 4.81%.
While hitting all-time highs can be viewed as a positive, we have to be mindful if it is coming from unsupported valuations. The Sep’24 ending PE Ratio of 24.8x was higher than the previous quarter and historical long-term averages of 20-21x. We maintain our underweight position to equity (check the asset allocation section) on the back of pricey markets. Additionally, we continue to prefer value stocks in large-cap space as compared to mid & small-cap (where we have exited completely).
Our inclination to take exposure in Chinese stock markets during the super cautious investor positioning in the last 1 year saw great reward this quarter. The Chinese government has introduced several economic stimulus measures, which triggered a massive rally. In fact, Chinese stocks had their best week in nearly a decade, and our portfolios have benefited from that!
Debt Market Insights:
The Indian bond market was pretty stable this quarter. With inflation easing and the RBI taking a more accommodative stance, bond yields saw limited movement, providing investors with a sense of stability. The benchmark 10-year government bond yield remained in the range of ~6.8% to 7%, largely unaffected by global volatility.
But beneath the surface, there was movement. As global yields adjusted, demand for Indian government securities increased, particularly among foreign investors seeking higher yields in emerging markets.
More recently, in its October meeting, the RBI maintained the policy rate at 6.5% as anticipated, while signaling a more dovish outlook, hinting at a potential start to its easing cycle. RBI Governor highlighted that food prices, which account for nearly half of India’s consumer price index, are expected to ease in the coming months.
Given the changes around interest rates and inflation outlook, how should we position our debt portfolios? Typically, longer-term bonds tend to outperform when interest rates are cut. Unfortunately, at this point we believe, investing in long-duration debt securities may not offer much advantage, as they provide little to no premium compared to short-duration securities. The market has already priced in most of the anticipated rate cuts, largely due to the distortions caused by excessive capital inflows to long-dated Indian G-sec securities. You can read our blog here to gain more insights.
Accordingly, for the debt portion of our asset allocation, we favor short to medium-term (1-3 Years duration) debt instruments as they provide decent yields with lower interest rate risk. Long-term allocations could focus on debt portfolios containing floating rate instruments, while arbitrage funds may be a good option for short-term surplus funds (with a holding period of up to one year) due to their superior tax-adjusted returns.
Other Asset Classes:
Gold: Globally, Gold had a fantastic quarter, its best in four years, going up around 13%. This was driven by strong demand, central bank buying, and global geopolitical tensions. Over the last year, gold has returned over 40%, and almost 50% over the past three years! In India, demand for gold, both for investment and jewellery, remained steady and the yellow metal ended close to INR 75,600.
Even as investor risk appetite grows, we believe gold will continue to be a solid hedge against inflation and global uncertainty, so we’re maintaining a 10-15% allocation to it in our portfolios.
Real Estate: Home prices across India’s major cities rose by nearly 20%, which has made affordability a bit of an issue leading to a 5% drop in sales. However, consumer sentiment remains positive. The festive season could bring a boost, as developers roll out offers, but we advise caution—prices have already gone up by as much as 50% in some prime areas, so it’s important to be selective when considering real estate investments. Our blog on how to approach calculating profits/losses for a real estate investment is a must-read.
Truemind’s Model Portfolio – Current Asset Allocation
Personal Finance Capsule:
Does your family know where you have invested?
Investment needs to be boring
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.
