India continues to be buy the dip market, and August was no different. Global markets tumbled on August 5 after the Bank of Japan raised interest rates for the first time in 17 years from 10bps to 25bps – creating fears of massive yen carry trade unwinding globally. JPY appreciated more than 10% against the USD, and on August 5, the Nikkei was down more than 10%, in the worst one-day global rout since the black Monday of 1987. Most markets started recovering soon after, though none of the major international equity markets are yet to make a new high (SPX rallied to a shade below its July peak; Japan, Korea, and Taiwan retraced about half of the losses). Nifty turned up promptly-in what is now becoming a typical buy-the-dip market and made a new high.

The breakdown on August 5 triggered multiple trend reversal signals, leading us to change the book positioning to aggressive shorts. By the time we received our reversal signals back to long, most of the damage for the month had already been done for Ambit365.  It was a challenging month, with the fund losing 1.87% (pre-fees and taxes). The since-inception return (inception date of 6 October 2024) is now 13.3%.

There is a clear learning here – we are in a very different market, dominated by a very different set of investors. Indian retail investors, who are setting the narrative, feel very confident and do not care about global developments as much as they did historically. In August, inflows in equity mutual funds were a record Rs 380bn, up 4.3% MoM and up 88.1% YoY. Year-to-date inflows (Jan to Aug ’24) are Rs 2700bn, up 58% YoY. For the last three months, most inflows (more than 50% in recent months) have been in the thematic/ sector funds, so investors are even ‘directing’ the fund managers on where to invest!

The current market environment necessitates a shift in investment strategies. What may have worked in the past may not be as effective now. One significant

IT Growth decelerates is arrested, acceleration to start soon: As per the Sine-curve framework, the IT sector is recovering from a declining growth phase to growth stabilization phase. i) After a slew of earning downgrades from Q4FY23 due to a soft demand environment, Q1FY25 saw earnings upgrades; ii) IT Services hiring (net) pickup up in Q1FY25 after three change in our approach is the gradual adjustment of the book’s positioning upon receiving reversal signals. This adaptability has proven to be beneficial in navigating the early September volatility, leading to a more stable performance. We will delve deeper into this in the outlook section.

The winds of change in favor of underperforming sectors, which started in June, continue and now appear a lot more structural. IT services and consumption stocks have turned up after 3-4 years of stark underperformance. In the recently concluding quarter, ex-tech US companies delivered solid results, doubling the pre-results growth expectations to 9% y/y. S&P500 beat analysts’ estimates by 13%, with about 80% of the companies ahead. This is typically followed by more IT spending (positive for Indian IT). We have Infosys and Persistent in our long book. Pharma continues to witness acceleration, which was helped further by the Biosecure Act passed by the USA (Lupin & Divis are our strong, long convictions). Rural consumption shows more solid signs of picking up (our largest position is HUL). We will discuss each theme in more detail.

consecutive quarters of decline, as utilization levels are at the peak levels and the deal ramp continues with no significant project cancellation. iii) Most companies commentaries are guiding for an improvement from the BFSI vertical (biggest segment) and North America.

 

 

 

Pharma- Growth is accelerating:

Pharma is on a roll with acceleration in i) growth, ii) margins & iii) capital efficiency driven by 3Ps – Lower pricing erosion in US generics, improvement in portfolio mix, and better pipeline monetization.

FMCG volume growth revival:

FMCG volume Q1FY25 was 5.6% YOY, a significant improvement from 1-4% over the last four quarters. The increase in the government’s Rural Development

expenditure (growth of 11.5% YoY to Rs 2.75trn, after a single-digit growth in FY24) will further boost the demand. Corporate managements has started to sound upbeat about broad-based demand revival.

 

 

Outlook:

September will most likely turn out to be the month of the Fed pivot. The US Federal Reserve is widely expected to start the rate cut cycle when they meet on 18 September. Markets are still debating whether it will be 25bps or the first cut will be larger at 50bps. We prefer a gradual easing cycle- this will keep the confidence alive that the economic health is still sound, sans some expected weakening in the labor markets. A jumbo cut may be interpreted as a response to deeper cracks in the economy. Nevertheless, it is a significant event that can set the course of the market in the coming weeks and months. RBI is also expected to follow with a cut, if the Fed obliges, in October. A gradual easing is likely to help equities. On the other hand, while the market has shown resilience in the last few months, risks cannot be ignored. Earnings growth has been slowing down.

For the June quarter, Nifty earnings grew by 7% YoY, compared to the average of 21% YoY in the last four quarters. And September is expected to be weaker. This strange confluence of major Central bank events and the micro can keep the markets very volatile. As mentioned earlier in this letter, we are now seeking relative safety and better performance in the areas of the market that have been laggards, and we have reduced the pace of changes in the stock book positioning. We continue our long bias in IT services, consumer companies, and pharmaceuticals. We have also added a private bank (Kotak), which fits a similar laggard theme, and insurance (Bajaj Finserve). Flows into equity funds remain firm, and the buy-the-dips style may continue. This will keep the markets very rotational.