Divergent March, 2019

2019-03-10

After a subdued 2018, the global equity market has come back strong in the year 2019. MSCI World gained by 10.7% during January-February. Within the emerging markets, China has been leading the pack with 18.04% amidst news on fiscal stimulus and expectation of probable trade deal.

However, India had underperformed its peers for the same period due to the uncertainty about the election outcome and even the Q3 FY19 have been a mixed bag which had adversely affected the investor sentiments.

We continue to experience a ‘Divergent’ trend in earnings across the market cap spectrum as Large caps have again disappointed but Mid-caps saw decent earnings and Small-caps have seen robust earnings.

The heavy correction in the Mid and Small-Cap space has shrunk the premium Mid-Caps (excluding PSU banks) had over Large Caps to fair levels. Such levels have often heralded an appreciating trend, as we have seen in the past.
With better revenue growth trends and corporate banks’ asset quality turning around are early signs of improving demand and should help boost earnings henceforth but dismal Auto and NBFC numbers have raised new concerns.
Going forward, monetary and fiscal policy, stable government and improvement in global demand and domestic consumption would be key drivers to determine earnings trajectory.

Globally, The US Fed’s swing to a more dovish stance and a probable truce between the US and China on trade war have surely helped push the global rally in risky assets. However, we believe most of the positives with respect to the trade deal have been captured. Further, the growth indicators have moderated in China and fiscal stimulus and monetary easing may take some time to revive the economy, improvement in economic activities in the UK hinges on Brexit.

We continue to stay cautious on equity markets as valuations have again steepened and general elections are just around the corner. However, any volatility in markets can be seen as an opportune time to increase your allocation to equities, preferably in the mid and small cap space can be done by staggering investments over next 3 months, as we believe that the broad underperformance of the mid-caps is overdone and interesting opportunities in selective pockets are now available in this space.

Due to the extreme valuations in January 2018, we reduced our allocations of the Mid & Small Cap Funds from 30% to 10% in our Aggressive Model Portfolio, anticipating a fall. It played out extremely well. We are now increasing allocation to Mid & Small Caps by 10% of strategic weights. This would take back the allocations to 20%.

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