Lately, global growth has seen some contraction with slowdown in manufacturing activity coupled with drop in business optimism. In the case of US, there are mixed signals. While manufacturing activity and consumer spending is getting impacted, real estate sector is seeing some revival and labor market remains relatively tight.

Policymakers in Developed Markets have sounded hawkish in their recent statements. The US Federal Reservein its June meeting held rates steady but indicated two further rate hikes in their dot plot this year. However, we believe another rate hike from the Fed is likely but that may be the last hike in this cycle. We continue to believe that rates will stay higher for longer than markets expect.

Despite global macro concerns, macro indicators in India continue to remain strong. Healthy GDP print of 7.2% for FY23 amidst the uncertainty clearly indicates that India has shown resilience to external shocks. This is also exhibited by underlying momentum in high frequency indicators. Manufacturing PMI(Purchasing Managers Index) for the month of June came in at 57.8% highlighting robustness, and capacity utilization are near the long-term average levels. With supply chain pressures already easing and input costs continuing its downtrend, corporate sector is in a good state, which is also evident by increased private sector investment intentions as recently highlighted by RBI. This bodes well for strong medium-term growth in India.

Indian markets have continued its rally in June and closed higher for the fourth successive month. It has been one of the best performing markets globally in 2QCY23. Another positive factor is that the rally in Indian markets has been broad-based with Mid & Small caps gaining more than Largecap names, thus highlighting the strength of domestic focused sectors. Favorable and continuous improvement in macroeconomic factors and reversal of FII( Foreign Institutional Investors ) flows have played a key role in the market rally. Since March 23, FPI( Foreign Portfolio Investment) flows into India have crossed ~$13Bn. International investors are increasingly buying into the idea that India is poised to overtake China as the engine of global economic growth, as it is far less exposed to geopolitical risks than China. Brent crude prices at a comfortable range with narrowing of CAD and a stable currency have also provided comfort. With moderation in inflation and sustenance of GDP growth rate, anticipation of further interest rate increase also seems to be behind us. In our baseline scenario, rate cuts if any will be shallow and linked to downside surprises on growth.

Post the recent rally, India’s valuations are slightly higher than long-term historical average levels. Broad market indicators of PE, PB and Market cap to GDP hint towards modest overvaluation. On the earnings front, decent growth of ~10% in FY23 on a high base of 34% in FY22 has also kept the sentiments buoyant. Lately, earnings sentiment has also improved across most domestic sectors. The positive macro growth outlook should be reflected in earnings trends in the coming quarters as well. Overall, we expect earnings to post healthy double-digit growth for FY24 driven by Banking, Autos, and Consumer Staples.

Going forward, growth recovery in earnings, progress on monsoons and policy actions by Central Banks would be key triggers for the market for sustaining performance given valuations are higher than long-term average. At the current juncture, we would advise investors to take measured allocation to equities and target equity allocation in an investor’s portfolio should be close to the median level.

With interest rates having inched up and expectations of moderate equity returns, fixed income also looks attractive. Overall, risk-reward seems balanced across asset classes, hence, a multi-asset allocation approach with exposure to Equity, Fixed Income, and Gold remains well-suited for the current environment. Within equity, domestic focused themes viz. Banking and Financial Services, Consumption, Domestic Manufacturing are preferred to global cyclicals.

Source: Bloomberg, ABSLAMC
Disclaimer- The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sectors)/stock(s)/issuers).

This page is a part of the July 2023 Factsheet of Aditya Birla Sun Life Mutual Fund. Click on http://empower.abslmf.com/ for the digital factsheet.

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