Key highlights from the February Consumer Price Index (CPI) and January Index of Industrial Production (IIP) are as follows:
The CPI held steady at 5.1% in February, indicating a modest sequential price adjustment. The Reserve Bank of India (RBI) is closely monitoring for tangible signs of a slowdown in headline inflation, while the consistent easing in core CPI offers confidence that monetary policy interventions are positively impacting the economy. This suggests a continuation of the current policy stance, potentially leading to a 25-50 basis points rate cut in the latter part of FY25.
Core CPI declined to 3.4% year-on-year, extending its downward trajectory for the eighth consecutive month. Food prices saw a slight uptick of 11 basis points on a monthly basis after significant corrections in the preceding two months, while fuel prices decreased by 11 basis points. Housing, clothing, and pan/tobacco prices witnessed moderate increases.
Services CPI remained unchanged at 0.2% on a monthly basis, with notable price increases observed in medical care and household essentials. Other categories also experienced modest upticks.
IIP growth registered at 3.8% year-on-year, demonstrating robust expansion considering the elevated base. Mining, manufacturing, and electricity sectors posted growth rates of 6%, 3%, and 6% respectively. Notably, consumer non-durables, intermediate goods, and infrastructure goods emerged as top-performing segments.
Across sectors, 14 out of 23 industries progressed year-on-year. Growth was particularly strong in segments such as other transport equipment, fabricated metals, motor vehicles, beverages, basic metals, machinery, textiles, and electrical equipment. However, production declined in sectors like computer & electronics, tobacco products, paper products, chemicals, and food products.
In summary, the data reflects a stable CPI with gradual price adjustments and healthy IIP growth supported by various sectors despite certain segments experiencing production declines.
Key Insights from the January 2024 CPI and December 2023 IIP:
• CPI moderated with a second consecutive month of decline in food inflation, particularly in vegetable prices. While the sustained reduction in core price pressures is encouraging, the RBI reiterated its commitment to maintaining monetary policy until the 4% CPI target is consistently met. Consequently, we anticipate the RBI to maintain a prolonged pause on interest rates and policy stance, as outlined in our post-MPC analysis. IIP growth showed resilience despite a high base effect. • CPI decreased to 5.1% in January from 5.7% in the previous month and 6.5% a year ago. Sequentially, inflation declined by -11bps compared to a -32bps decrease in the previous month. Core CPI, at 3.5% year-on-year, continued its downward trajectory for the seventh consecutive month, rising by +31bps month-on-month compared to +2bps in the preceding month. • The decline in vegetable prices (-5% month-on-month) contributed to a reduction of -58bps in headline food inflation, compared to a -73bps contraction in the previous month. Housing and fuel & light prices increased by 0.4% each, while clothing and pan/tobacco prices rose by 0.2% and 0.1% respectively. • Services CPI remained stable at 0.2% month-on-month, consistent with the previous month. The highest price hikes were observed in medical care (0.4%) and personal care (0.3%), with other categories experiencing increases of 0.1% to 0.2%. • IIP growth improved to 4% year-on-year, up from 2% in the previous month and down from 5% in December 2022. • Mining, manufacturing, and electricity sectors recorded growth of 5%, 4%, and 1% year-on-year respectively, with 12 out of 23 industries advancing year-on-year. Notable contributors to IIP growth included other transport equipment, motor vehicles, fabricated metals, and basic metals. • Consumer durables, primary goods, and infrastructure emerged as the top-performing segments. • CPI at 3-month low: January’s CPI eased to 5.1%, lower than the PC/Consensus estimates of 5.3%/5%, down from 5.7% in the previous month and 6.5% a year ago. Core CPI decreased to 3.5% year-on-year from 3.8% in the previous month, with a month-on-month increase of 31bps compared to a rise of 2bps in the previous month. Food inflation decreased by -58bps month-on-month, driven by declines in vegetable (-4%) and fruit prices (-2%). Housing and fuel & light prices increased by 0.4% each, while clothing and pan/tobacco prices rose by 0.2% and 0.1% respectively. Services inflation remained stable at 0.2%, with the highest price increases observed in medical care (0.4%), personal care (0.3%), household requisites (0.2%), recreation (0.2%), education (0.2%), and transport & communication (0.1%). • IIP growth accelerated: December’s IIP witnessed 3.8% year-on-year growth, surpassing the PC/Consensus estimates of 3.5%/2.5%, up from 2% in the previous month and 5% a year ago. Sequentially, IIP recorded a 7% improvement compared to a -2% decline in the previous month. Mining, manufacturing, and electricity sectors registered 5%, 4%, and 1% year-on-year growth respectively, compared to 10%, 4%, and 10% growth in December 2022. Among the use-based segments, all segments exhibited stronger year-on-year growth, with consumer durables (5%) leading the way, followed by primary goods (4.6%) and infrastructure goods (4%). Sequentially, consumer non-durables continued their growth trend from the previous month, while other sectors rebounded from the contraction observed in the previous month. Sector-wise, 12 out of 23 sectors recorded year-on-year growth, with notable advancements in other transport equipment (29%), motor vehicles (9%), fabricated metals (9%), and basic metals (7%). However, production declined in tobacco products (-9%), paper products (-6%), and computer & electronics (-5%), while chemicals and machinery production remained stable.
During the February 2024 meeting, the RBI Monetary Policy Committee (MPC) opted to keep the repo rate steady at 6.5% and maintained its existing policy stance, which remains geared towards actively reducing inflation to ensure that headline inflation aligns with the 4% target over the long term. The decision to maintain the stance unchanged stems from incomplete transmission of rate increases to the credit market.
The RBI Governor highlighted ongoing uncertainties in food prices that continue to impact the trajectory of headline inflation. The MPC will vigilantly monitor any indications of widespread food price pressures that could undermine progress in easing core inflation. Additionally, the Governor acknowledged that liquidity conditions are influenced by external factors, such as high government balances, and the Reserve Bank intends to utilize an appropriate mix of tools to manage both short-term and lasting liquidity.
The RBI’s projections for fiscal year 2025 anticipate inflation at 4.5% year-on-year, while retaining the forecast for fiscal year 2024 at 5.4%. Favorable rabi sowing and adjustments in seasonal vegetable prices bode well for the inflation outlook. However, risks to this trajectory exist due to adverse weather conditions and disruptions in the supply chain arising from geopolitical tensions.
Expectations for real GDP growth in fiscal year 2025 are set at 7% year-on-year, with household consumption expected to strengthen. The outlook for fixed investment appears promising due to an upswing in private capital expenditure, improved business sentiment, strong financial positions of banks and corporations, and sustained government focus on capital expenditure. Nevertheless, the growth forecast faces challenges from geopolitical tensions, volatile financial markets, and economic fragmentation.
We anticipate the RBI to maintain its current stance at least until the June 2024 policy review. Monitoring the Rabi season production and IMD monsoon forecasts for 2024 will be crucial in assessing the trajectory of food inflation. Given the confidence in GDP growth, monetary policy will continue to prioritize achieving the inflation target. The RBI is also expected to keep liquidity close to neutral levels to mitigate risks to financial stability and inflation associated with excess liquidity, and to align overnight rates with the repo rate.
Successful market timing has long been the elusive goal for many investors. It’s an enticing prospect, especially when there appears to be compelling evidence suggesting that simple valuation measures can forecast future market performance. However, as both researchers and investors have come to realize, consistently outperforming a passive buy-and-hold strategy is far more challenging than it initially appears.
I aim to explore the fundamental question: Is market timing a valuable strategy to enhance investment returns, or is it a perilous path best avoided?
The allure of market timing lies in the belief that by making precise entry and exit points in the market, one can capitalize on favorable trends and avoid steep downturns, thereby maximizing returns. This premise is supported by in-sample evidence, which, when examining historical data, appears to provide a strong case for the effectiveness of market timing strategies, particularly when based on simple valuation measures.
However, the real-world application of market timing often yields disappointing results. The out-of-sample performance, which reflects how these strategies fare in the actual market, tends to be weaker and less reliable. In other words, while the theory behind market timing seems solid when tested on historical data (in-sample), it doesn’t hold up as well in the unpredictable world of real investments (out-of-sample).
Introducing a new perspective that seeks to bridge the gap between the encouraging but in-sample evidence and the often underwhelming out-of-sample performance. The proposed approach involves incorporating a dose of one factor Momentum into value-based timing strategies. Momentum, in this context, refers to the concept that assets that have performed well recently are likely to continue doing so for some time, while underperforming assets may continue to lag. By combining value and momentum factors, investors can potentially enhance their market timing strategies.
The rationale behind this approach is that adding momentum can act as a practical enhancement to value timing strategies. Value-based timing might tell investors when assets are undervalued or overvalued, but it doesn’t necessarily provide a clear sense of when to enter or exit the market. Momentum, on the other hand, offers insights into the current market trends and helps investors identify opportunities for buying or selling.
In conclusion, the pursuit of successful market timing is both tantalizing and challenging. This approach acknowledges that while market timing may not be a guaranteed source of added value, a well-thought-out strategy that combines multiple factors may offer a more effective means of achieving the desired investment outcomes.
In this newsletter, our aim is to elucidate the significance of Capital Allocation.
Markets operate as predictive mechanisms, often anticipating events such as the Federal Reserve’s interest rate hikes. Nevertheless, the extent of these increases was unforeseeable, transitioning from near-zero interest rates to 5% within 18 months, marking a substantial surge.
On October 18, 2021, Indian equity markets reached represented by the BSE 100 a previous peak hit 61,765, and later achieving a historic high of 66,800 on September 20, 2023, resulting in an XIRR of….wait a minute……
4.16%, that’s lower than Fixed Deposits. For those who invested around this period, its been an agonising impatient journey with several other macro factors , wars & geo political challenges adding to the woes.
Since October 18, 2021, off the Top 100 companies 46 of them yielded returns below the 4.16% XIRR. If one contends that a 12% weighted average cost of capital is normal, then 52% of companies generated returns below this. 20 large cap companies have delivered an average ofnegative 30% during this period. This challenging scenario has posed difficulties for even the most skilled fund managers. Examining the performance of some large-cap fund managers.
Listed here are some of the large cap fund managers who from time to time have often demonstrated top quartile performance and their performance since 18 October 2021.
Though we are comparing amongst a small but a very critical period, did Investing Systematically Work?
It clearly didn’t…the difference is just 6bps.
The BSE 100, comprising the top 100 companies by market capitalisation, has experienced this trend due to investors favouring high-quality firms in a low-interest-rate environment. Quality is characterised by companies with a High Return on Equity and a consistent delivery of a higher incremental Return on Capital Employed. In a low interest rate environment these firms equity valuations have undergone significant revaluation, with their multiples due to its expansion and not necessarily aligning with their earnings. Despite earnings realisation, a substantial portion of the valuation was already factored in. As these are sizeable companies with ample liquidity, corrections may not occur swiftly, manifesting as time corrections that can be arduous. However as written earlier 20 large companies saw swift price corrections from 18/10/2021. Patience, extending over at least another 2-3 years, is necessary for holding onto these investments before one may start seeing gains above cost of capital.
The companies that delivered the highest returns in this period.
Top 10 Stocks Contributed Returns
Varun Beverages Ltd.
Adani Power Ltd.
Tube Investments of India Ltd.
Trent Ltd.
Bank Of Baroda
Cholamandalam Investment and Finance Company Ltd.
Bharat Electronics Ltd.
The Indian Hotels Company Ltd.
Coal India Ltd.
Max Healthcare Institute Ltd.
Source : AceEquity.
Examining the current composition of the top-performing funds and their Top 10 Stocks, you’ll notice that the majority of these companies are absent from the active bets made by leading funds. This is primarily attributed to the mandates of large-cap funds, which require them to deploy substantial amounts. Moreover, many fund managers replicate the stocks in the index, and the disparities in excess returns are evidently influenced by the selection of stocks and the applied weightage.
Source : Ace Equity, Morningstar, Growthfiniti Wealth Pvt Ltd Research
Obviously while this has been amongst the most difficult period for markets especially when the index has delivered returns much lower than a fixed deposit, what has stood out is Value as a Factor.
Value, as a factor in investing, refers to the strategy of seeking out stocks or assets that are believed to be undervalued or priced lower than their intrinsic worth. Investors employing a value-oriented approach typically look for opportunities where the market has underestimated a company’s true value, considering factors such as earnings, dividends, book value, and other fundamental metrics. This approach contrasts with growth investing, which focuses on companies with the potential for aboveaverage future growth. Since growth companies had already expanded in a low interest regime, Value did very well in a opposite scenario as investors look to book gains and move to low PE stocks.
The strategy of good capital allocators & wealth firms is centred on the efficient deployment of financial resources to optimise returns for a given level of risk. Successful capital allocators possess the ability to assess various investment opportunities, weighing risk and reward factors, and allocating capital where it is likely to yield the highest returns relative to the associated risks. This involves a keen understanding of the market, and industry dynamics and the effectiveness of an underlying asset. Effective capital allocators may reallocate capital based on changing market conditions and strive to optimise the overall portfolio performance, an exercise that can be carried at a defined level of frequency.
Going forward we believe that one style of investing will not work. Diversification across Factors will be a key to compounding.
Happy Investing.
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