17 Nov 2022
Investment Note:
We plan to move approximately 40% into Equity from our total portfolio.
Tentative Plan:
Nifty CPSE ETF
L&T Finance Holdings Ltd
BHEL/Other PSE Stocks
Macro Economic Set Up:
Every 10-12 years we see a sector rotation in equity/global markets. From 2008 to 2022 the world economy saw a technology boom. From December 2021, NASDAQ has seen a fall of about 32%. With rising interest rates, and considering the inverse relationship between rising interest rates and stock prices of technology companies, we think the pain is here to stay.
While technology companies have seen massive stock price corrections and layoffs, commodities on the other hand have broken their 15-year consolidation resistance zone. Due to this older economy sectors like power, metals, capital goods, etc have seen huge rallies. Rising global inflation also supports this trend.
Graph: Comparing Tech vs Oil & Gas Stocks
This global sector rotation is the reason why the US markets (S&P 500) saw a decline of 25% from their all-time highs whereas Indian Markets are trading at all-time highs. The US as a country is focused on Technology and FMCG goods - both of which have run their course; whereas a country like India is more manufacturing oriented. The US dropping 25% and India trading at all-time highs is an extremely unique situation, but any market that can show this kind of resilience will surely be the leader in the next rally. All UK, US & Eurozone are facing massive issues with inflation, debt and some even with currency. It sets the perfect ground for South American and Asian countries focused on manufacturing.
One of the biggest beneficiaries of money moving into old-school sectors in India have been the PSU Banks - seeing a massive rally of around 33% (Nifty PSU Index) in the last 1.5 months. We believe that PSU Enterprises should follow this trend.
While we continue to be bullish on manufacturing stocks in the coming 5-7 years, we do expect the global markets to see further corrections in 2023. At the moment inflation numbers have started showing signs of cooling off and the FED’s commentary has turned slightly dovish indicating signs of reducing the pace of interest rates. Equity markets like this. We expect a blow-off top in equities in 2023 - a massive rally in equities globally followed by a steep correction in prices. For the time being, we ride the equity wave.
Stock/ETF Rational:
The CPSE Index covers 10 Central Public Sector Enterprises across the following sectors: Power, Oil & Gas, and Capital Goods. It is the ideal method to take exposure to Old School Economy Stocks. While we are extremely bullish on these sectors, we are waiting for some resistance levels to be crossed given the sensitive economic global conditions, to ensure that this trend will continue at least for the next 6-12 months.
L&T Finance Holdings (NBFC) provides finance for rural, housing and infrastructure projects. Their exposure to infrastructure is what makes us super bullish on the stock. We believe that NBFCs catering to this sector will follow in the footsteps of PSU Banks in terms of stock prices.