Slippage in returns, the first in 2 years
CY22 has been dramatic so far, and it shows through the first quarterly decline in returns from equities in nearly 2 years. The Russia-Ukraine conflict added a new dimension to the already persistent uncertainty.
Ampersand NAV was down 2.8% and underperformed major indices for the first time in a year, and also the first quarterly decline in 2 years. However, our fund has delivered cumulative returns of 113.6% since inception in Sept 2017 and 33.7% in FY22, both well ahead of key comparable indices.
As on March 31, 2022, our fund consists of 29 stocks and a cash surplus of 4.8%.
IT was one of the reasons for our modest showing
Since identifying digital transformation as a structural theme over 2 years ago, IT has been one of the key overweight sectors in our fund. Our exposure has consistently hovered in the 20-24% range. And this has served us well, driving fund outperformance over an extended period. However, during the quarter under review, sector index declined ~10%, and consequently dragged our fund returns.
However, it would not be fair to pin down the performance to IT alone. Financials (our 2nd highest exposure) continued to lag the broader market despite improving fundamentals, mostly due to technical reasons like foreigner selling. Finally, substantial tax outgo for the fiscal impacted returns by ~150bps viz over half the contraction.
Bull market is far from over
We are expecting low double-digit annual market returns for FY23e, measured on benchmark indices like the Nifty. This will largely be supported by ~20% corporate earnings growth, led by Banks, Materials, Energy, Capital goods and IT services sectors. These collectively account for over 70% of Nifty, and should mostly benefit from the inflationary situation. On the other hand, consumer focused sectors will be impacted by input cost pressures, which is more than compensated by the beneficiaries.
Inflationary pressures could ease off in coming months
The biggest risk to our bullish stance is sustenance of inflationary pressures, which in turn could lead to surge in interest rate and consequent contraction in consumer demand. As we know, the spike in inflation is due to continued supply shocks, initially due to the pandemic and more recently due to the Ukraine conflict. We believe there are good reasons for inflationary pressures to peak well before CY22 comes to a close, namely :
- Leading economies like USA and the EU are keen to control inflation, and have started to raise interest rates
- Container freight rates, a key lead indicator of inflation has softened 20% in past 3
months - Worst of supply cut fears related to sanctions on Russia, already reflecting in prices
- China’s decision to lockdown to control pandemic is impacting its domestic demand more than global supply, as reflected in stable prices.
Elusive capex theme finally coming into play
Increased capex towards capacity expansion as well as rebuilding of the supply chain, both globally and in India is imminent. This is evident from the announcement of nearly Rs 7.7tn capex plans by India’s private sector last fiscal, the highest in a decade and up 87% yoy. Recovery in the capex cycle therefore is likely to emerge as a huge opportunity in the coming years. We identify key drivers as follows:
- Capital intensive sectors such as Steel, Aluminium, Textiles etc are operating near full utilisation, after several years of under investment
- Borrowing ability of India’s corporate sector has improved ubstantially, with 85% of corporates showing improved credit rating scores last fiscal, a decade high
- The pandemic followed by the Ukraine conflict has necessitated the need to improve the supply chain, and thereby reduce excessive dependence on countries like China, and now Russia.
Ampersand portfolio aligned to changing market dynamics
Although it is almost impossible to remain insulated from global turmoil, Ampersand
portfolio by design has reasonable exposure to commodity agnostic sectors like Banks,
Retail, Leisure, IT services and even a bit of Pharma/Healthcare.
Thematically, we remain cautious on domestic consumption due to inflation hurting purchasing power. However, we do expect demand to sharply rise for Travel, Leisure and Retail related sectors, especially on the low pandemic impacted base years of FY21/FY22.
In the IT services sector, talent shortages are hurting but could ease in the next 6 months as freshers get inducted. Our present investment choices are selective, and include names with domain specific tailwinds which will enable superior growth.
In pharma, we favour integrated players with domestic centric focus. We also believe well run hospitals will be key beneficiaries of medical tourism.
Finally, we are actively considering investing in beneficiaries of capex spends, which will address supply-chain rebuild efforts globally.