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Leap Week Lunacy 💣

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Just when you think you’ll get a calm end to the month, Rihanna goes to Jamnagar, Bill Gates stands creepily next to Dolly Chaiwala, an IED blows a hole in Rameswaram Café, and Russia bans oil exports for 6 months (this may or may not be in order of importance).

Even the markets saw some turbulent times as the week progressed, with namely 3 iconic incidents that left a mark in the hearts of investors - so what’s up, market?

1. The AMFI Letter

Owing to the steep valuations in mid-and-small-cap stocks, the Association of Mutual Funds in India issued a letter to the mutual fund houses of the nation, asking them to take precautions and safeguard investor interest in case the market crashes.

These mutual funds have 2 tasks ahead of them:

  • Rebalance portfolios to ensure that existing investors can retain their profits, while also increasing exposure to safer spaces like large caps or just maintaining a cash balance

  • Reduce inflow into these mid-and-small-cap funds so that new investors don’t drive up the price of these stocks further, or worse, enter this space just when it is about the crash

This seems to be a fair ask since the massive inflows into these schemes are partially accountable for the insane rallies and subsequent high valuations.

For context, in 2023, mid-cap mutual funds got inflows worth Rs 22,913 crore, and small-cap funds got inflows worth Rs 41,035 crore, while large-cap funds saw an outflow of Rs 2,968 crore!

If inflows into these funds are left unchecked, the valuations could virtually move upwards till no end - and the bigger they are, the harder they fall.

2. The Index Rejig

NSE’s Index Maintenance Sub-Committee (sounds cooler than it is) sat down on the leap day and decided, “Let’s just change a bunch of stocks from the Nifty indices” - and so they did.

A total of around 40 changes were made across the top 500 stocks in the Nifty, with some of them being noteworthy:

  • UPL has officially kicked off the Nifty 50, post its consistently horrible financial and stock performance, and is now being replaced by Shriram Finance

  • In the Nifty Next 50, companies like Adani Wilmar, Muthoot Finance, PI Industries, and P&G were removed, while companies like Adani Power, Indian Railway Finance Corporation, Jio Financial Services, Power Finance Corporation and REC were included

  • Apart from the above, AstraZeneca Pharma, Indian Renewable Energy Development Agency, Honasa Consumer, Inox Wind, and Jai Balaji Industries were included in the Nifty 500

Coupled with these changes, the sub-committee has also made alterations to the method behind making these changes. Instead of just taking the company’s overall market cap, these 3 things will be taken into consideration:

  • free float of the market cap (how many shares are actually being traded),

  • its performance in the Future and Options segment, and

  • how many times it touches the circuit limit in the past 6 months

With more regular meetings of this committee to be scheduled, index rejigs might become more common than previously imagined!

3. The GDP Numbers

Ending the week with some good news, the GDP print for 3QFY24 squealed with an ecstatic 8.4% YoY growth, way above the expectations that economists had of 6.6%!

While this growth number has been recognised as a 6-quarter high, the party poopers (economists) came in to spoil the fun and added some jargon into the mix while they were at it.

According to them, this quarter’s growth should be looked at using a term called Gross Value Added (basically, GDP - government subsidies). GVA seems to show a much more sober 6.5% YoY growth rate for this quarter (in line with the economists).

This difference between the GDP and GVA has been attributed to some fertilizer subsidies that the government didn’t deploy in FY24 as yet, making this the largest variance between the two metrics in the last 2 years. To put it simply,

  • if GVA<GDP = subsidy hasn’t been deployed

  • if GVA>GDP = excess subsidy has been deployed

Yet, the 8.4% GDP growth is still great news as private consumption is picking up again, and this could be an additional push for voters to allot another term to the Prime Minister.

What Does All This Mean?

As we enter March and move closer towards the election period, markets might remain see-saw-esque as valuations start taming. We remain clear of the strategy - be selective, choose fundamentally strong stocks with high earnings growth and visibility, and valuation comfort.

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