Equity markets in November were a replica of that in October, in terms of performance, and disparity.
The Nifty 50 was up 5% in November (4% in October), and mid/small caps were up 2% in November (just like last month).
Within the Nifty 50, most of the performance was primarily driven by commodities, banking, technology and consumer stocks.
The skew led to most portfolios:
Outperforming the mid and small-cap indices, but
Underperforming the Nifty 50
Markets in November
There have been some positive indicators, which the markets have been taking their share of optimism from:
CPI inflation in the US inched down
The Fed indicated slowing the pace of rate hikes to 50 bps, from the earlier 75 bps
India’s inflation too showed a lower rise
IIP data for September showed strength
Corporate earnings have been resilient
Expectations of a lower rate hike in the US provided some strength to the INR
However, there are indicators which don't bode too well for the markets
The US job market is still hot, which casts a doubt on the Fed’s ability to start lowering the pace of rate hikes
The probability of the US and EU dipping into a recession has been rising, and that’s bound to impact domestic markets too
Despite some lowering, inflation still remains way above the comfort level of central banks
The pace of rate hikes may show, but we aren't really getting out of a rate-hike environment any time soon
China has imposed tighter restrictions to control Covid, and that has sparked fears of continued supply chain issues
While equities did well, both in the US and in India; other asset classes remained tepid:
Mid and small-caps continued to underperform large caps
Debt continued to remain under pressure from rate hikes
Rupeeting in November 2022 - Equity Portfolios
All our Equity portfolios other than Value Migration underperformed the markets. We attribute this to:
Higher exposure to mid and small caps: During the month, while large caps were up 4%, mid and small caps were up just 2%
Lopsided performance of the markets: Even with large caps, the sectors that drove the rally were commodities, banking, technology and consumer. Because of this, only portfolios with large caps, and enough exposure to these sectors benefited
The outperformance in Value Migration was driven by a few stocks like Rail Vikas Nigam (RVNL), which was up 85% in the last month alone.
Rupeeting in November 2022 - All-Weather Portfolios
We had reduced exposure to equities at the end of September 2022, and that saw a sharp rally in the last two months (what a fail!). However, our other decisions continued to be on the right side of the equation, which has led to us being in line with benchmarks.
What worked for us?
Reduced exposure to mid-caps relative to large caps
Split exposure within debt equally between corporate debt and government debt
Lowering the tenure of our debt exposure
What’s next for the market?
The impact of rate hikes has been mildly seen in inflation; but not yet in economic data or in corporate earnings.
More rate hikes and a deteriorating global economic environment pose a risk to earnings in India.
With risks elevated; valuations at an all-time high, and the gap between earnings yield and bond yields increasing, the risk-reward doesn't look appealing at the moment.
That said, India’s fundamentals are extremely strong, and we’d like to ride the India growth story, but by only buying into the markets at reasonable prices, that is, when they see dips.
Or by being placed in areas relatively unaffected by larger factors, and seeking valuation comfort.