Equity monthly view for October 2021

S&P BSE SENSEX increased by 0.44% on a total return basis in the month of October 2021. It has had a large underperformance vs. its developed market peers such as S&P 500 (7.0%) & Dow Jones Industrial Average Index (5.9%). After this month’s underperformance, the YTD performance of SENSEX & S&P 500 is very similar.

The broader market has underperformed the S&P BSE Sensex this month. The S&P BSE Midcap Index was flat during the month and the S&P BSE Smallcap Index declined by -0.33%. With this month’s performance, the Midcap & the Smallcap index have given the return of 42.1% & 55.7% respectively on a YTD basis. Buoyed by good quarterly results, Consumer Discretionary & Banking sectors stood out in terms of returns appreciating by 4.5% each.

Quantum Long Term Equity Value Fund (QLTEVF) saw a 1.04% appreciation in its NAV in October 2021. This compares to a 0.37% appreciation in its benchmark S&P BSE 200. Cash in the scheme stood at approximately 6.3% at the end of the month. Some of the sectors like Autos & Banking, where the fund has significant exposure generated better return than the benchmark, resulting in outperformance of the fund this month. QLTEVF’s portfolio positioning remains tilted towards cyclical as they benefit the most from a broad-based economic recovery.

Half-yearly results indicate improving demand outlook, but operating costs are inching up

Equity Markets had a parabolic & polarized move in Aug-2021 & Sept-2021 (Sensex moved up by 11% in two months). This means we entered the H1FY22 result season with elevated expectations. Market reactions have been extreme so far both in terms of rewarding companies which beat expectations & punishing those which have missed them. Technology & Banking sectors results have been strong. Some of the consumption companies though have reported strong revenue growth but have missed on profitability due to high input costs. Overall, till the end of October, results have been a mixed bag, with a slight bias towards companies seeing EPS upgrades vs. those seeing downgrades.

The management commentary post in post result conference calls indicates improvement in demand across sectors. However, amidst all these talks of demand recovery, managements are quick to add a comment on pressure on operating margins due to higher input cost inflation. Corporates clearly are facing a dilemma of either live with margins erosion or risk of jeopardising the still frail demand recovery by price hikes.

By the mid of this month as earnings season comes to an end, we will be able to clearly comment on the continuity of the earning upgrade cycle (an important driver for equity markets) which started in Q2FY21.

FPI outflows due to taper tantrums

October-21 has seen FPI outflows to US$ 1,892 mn vs inflows of US$ 1,792 mn in the month of September-21. This is the highest monthly FPI selling since March 2020. On a YTD basis, FPI inflows stand at US$ 6,462 bn. Seen in the light of US Federal Reserve’s imminent tapering. The volatility in FPI flows is not entirely unexpected. However, in the medium & long term, India’s nominal GDP growth will look better than the western world & inflows should resume after a pause. DIIs have remained net buyers for October 2021 to the tune of US$ 202 mn.

The second leg of the macroeconomy cycle & equity market returns

Having picked most of the low hanging fruits in the last 12-18 months, macroeconomy & stock markets are entering a more difficult phase of economic recovery & equity performance. The resurgence of Covid-19, the U.S Fed’s tapering & subsequent interest rate hike and higher than expected inflation are some of the macro variables which can increase market volatility in the next few months. However, from a medium-term perspective, the two key drivers of equity markets; a) Corporate earning upgrade & b) liquidity appear sanguine.

• With the economic recovery in place, we are in the first meaningful corporate earning upgrade cycle since 2014. Sectors with strong multiplier effects in the economy like real estate & IT are seeing steady recovery. An uptick in private CAPEX cycle in the next few quarters, if it happens, will further confirm this trend and will be positive for equities.

• On liquidity, US Federal Reserve’s imminent tapering is clearly the most significant risk to FPI flows in the near term. However, in the medium & long term, India’s nominal GDP growth will look better than the western world. This makes it a sought-after destination for yield & growth-seeking long term global investors. Domestic institutions are again seeing positive flows in the last few months from retail investors. The biggest risk to liquidity is retail flows to direct equities which is at an all-time high. Near term volatility in return expectation can result in sharp outflows from direct retail investors.

After the recent rally, the benchmark indices appear expensive. Nonetheless, markets are heterogeneous & not everything is cheap or expensive at the same time. Investors should look at active funds with portfolio P/E multiples ideally more attractively valued than the benchmark but offering a very similar or higher growth profile. Lower P/E reduces the drawdown risk, but a similar growth outlook indicates the portfolio’s ability to capture the upside sufficiently.

From a long-term financial planning perspective, investors should create a diversified equity portfolio through a mix of 5 to 6 schemes of varying styles and market capitalizations. A value fund as the anchor fund can be (20% to 25% of total exposure) layered with funds of different market capitalizations. Thematic-ESG funds could also be explored. It is advisable to review & rebalance the portfolio every six months. Given the near-term volatility, a time horizon of 3 to 5 years seems good for any equity investment.

Data source: NSDL

Name of the Scheme	This product is suitable for investors who are seeking*	Risk-o-meter of Scheme	Risk-o-meter of Benchmark
Quantum Long Term Equity Value Fund (An Open Ended Equity Scheme following a Value Investment Strategy) Primary Benchmark: S&P BSE 200 TRI	• Long term capital appreciation • Invests primarily in equity and equity related securities of companies in S&P BSE 200 index.	Investors understand that their principal will be at Very High Risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
The Risk Level of the Scheme in scheme Risk O Meter is basis it's portfolio as on October 31, 2021.
The Risk Level of the Benchmark Index in the Risk O Meter is basis it's constituents as on October 31, 2021.

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