An uncertain Summer has been the highlight of the past month, with temperatures soaring to an all-time high. The human race has contributed massively climate change through activities that may spell development, but also bring about a sea change in the ecological balance around the world. India’s dependence on weather conditions is significant when it comes to the availability and productivity of labor. A report from RBI’s Department of Economic and Policy Research (DEPR) finds that changing weather patterns could cost 2.8% of India’s GDP. For the growth of the country to remain sustainable, it’s important to ensure preparedness for ESG requirements.
The month of May was an interesting for other reasons too; with it being the results season. Expectations around the election outcome also led to increased market volatility during the month. The S&P BSE Sensex witnessed a low of 72,404 points before finally ending the month at 73,916 as US treasury yields climbed. Foreign portfolio investors (FPIs) also turned net sellers but remained bullish in the F&O segment, as indicated by the rising long-short ratio (LSR).
Other macro factors that impacted the markets include the geopolitical tensions between Iran and Israel. If the conflict continues, we’re likely to witness a decline in the supply of crude oil, resulting in a rise in prices. The impact of this could be heightened in case of a blockade to the Strait of Hormuz. Closer to home, expectations around a subdued monsoon are also causing markets to react negatively. Having said that, we’re likely to witness a turnaround in the markets albeit short lived, based on the outcome of the general elections.
Cyclical sectors like Capital Goods, Autos and Auto Ancillaries and Infrastructure posted the largest earnings growth at a PAT level during the month. The table below shows the performance of the top 10 BSE sectors over the past 1 month.
With multiple factors impacting the markets and some amount of uncertainty, mutual fund managers seem to be making marginal changes in their portfolio. The table below shows the average sector holding changes in equity mutual funds during the period between February and April 2024 in percentage terms. These allocations are also indicative of the opportunities that managers are able to find based on fair valuations.
Here’s a brief look at the factors that are driving these allocations:
Banking and Financial Services
The world has witnessed an inflationary trend characterized by a high interest rate environment for nearly over 2 years now, only to see rates softening since February 2024. As credit drives the economic environment; banks will benefit from expectations around falling rates over the medium term. Resultantly, we’re witnessing a gradual increase in the allocation towards this sector.
Information Technology
IT services have been under pressure owing to a rising Global interest rate environment over the past 2 years. Sluggish growth dented margins during FY24, with most IT companies failing to meet their revenue growth targets. A lower visibility in sight has led to a large number of Asset Managers lowering their allocation to IT services sector.
Refineries
The Iraq-Iran war and the resultant pressure on Crude imports will lead to India Inc. witnessing a rise in oil prices. Refineries and processing plants will face the brunt of this geopolitical event, the impact of which is likely to last over the medium term. As a result, the sector is finding lower levels of allocation in MF portfolios.
Capital Goods
India’s real growth can only come with increased capital expenditure. Government Capex can stimulate overall economic activity and lead to increased demand in goods and services produced by private firms. The next 5 years will be characterized by strong reforms in public expenditure and lead to an increase in Capex spending. Whilst Asset Managers seems to realize this, they have increased allocations in moderation.
We’ve come a long way into building a nation that is well on its path to economic stability and resilience. But what makes it interesting is the fact that there’s so much more scope for growth and development, something that all investors into the Indian markets can look forward to gaining from.
