BEING TOO FAR AHEAD OF YOUR TIME IS INDISTINGUISHABLE FROM BEING WRONG - HOWARD MARKS

“…HE DIDN’T BELIEVE THERE WERE MANY, IF ANY, STRONG THREEQUELS OUT THERE, WITH THE EXCEPTION OF “ROCKY III” …” – LEGENDARY FILM DIRECTOR CHRISTOPHER NOLAN, COMMENTING ON THE MAKING OF ‘THE DARK KNIGHT RISES’ - THE THIRD SEQUEL OF THE BATMAN SERIES.

This is the last and final part of our Winds of Change trilogy. High volatility from January to June started the cycle rotation process, finding roots in June with the catalyst in the form of the Lok Sabha election results outcome. While our Sine Curve considers heightened volatility as a lead indicator of the market losing confidence in existing underlying trends and new trends emerging, we did not want to be early. Ambit 365 aligned the portfolio to Winds of Change in June 2024 – which worked well for us in July. The NAV was up 2.5% in July (pre-fees and taxes), and since inception return is 15.5% (inception date – 6 October 2023). The market was strong this month (Nifty up 3.9%). While most of our returns came from the long book, short book losses were minimal, which was heartening. 

We wrote about the cycle upturn in two sectors: IT Services and Consumer. IT services contributed about half of the long-book performance. The up move in consumer companies has been slower, but we expect it to continue. We also wrote about consolidation in PSU banks and industrials. Our short book made positive returns from both, but a strong recovery in Nifty towards the end of the month neutralized these gains.

 This newsletter will discuss the upturn in the IT and consumer sectors. Most IT majors beat analyst consensus estimates for the June quarter, and few guided towards better growth visibility, especially from the BFSI space. As we had expected, the Government did a balancing act during the budget presented on 23rd July 2024 and increased the revenue expenditure for FY25; the Government’s revenue expenditure is now budgeted to grow at 6.4% for FY25, as compared to the interim budget (presented on 1st February 2024) plan of 3.2%. This additional spending is funded from the RBI dividend (which was 63% higher than the earlier estimates, hence providing the cushion) – and the Government did not deviate from the fiscal deficit target. This will help the rural consumption further – which has been showing signs of revival. Commentary by all consumer companies has been encouraging

OUTLOOK

The world is very close to witnessing two significant monetary policy stance shifts. The Bank of Japan is ready to raise rates, while the USA’s Federal Reserve is now close to start the rate-cut cycle. BOJ had announced plans to raise rates, but a sharp 12% appreciation in Yen and a 20% drop in the Topix forced them to backtrack (waiting for more stable conditions). US economic data has become weak, forcing the Fed closer to policy reversal. Global markets saw huge volatility during the first week of August- what appeared to be a 1987 Black Monday-type meltdown on Monday the 5th August 2024 seemed knee-jerk by Friday the 9th August 2024, as most markets clawed back the losses. Two questions will be the focus in the coming months: a) How large is the Yen carry trade globally and what kind of disruptions unwinding can cause as the yield gap between Japan and the USA narrows? b) Can the US economy avoid a hard landing, or will there be a deeper recession? We will follow these closely and be ready to shift our allocations.

Ambit 365 has been booking gains in IT services after a strong run (NSE IT index has rallied >30% from its low on 6 June to its high on 29 July). Fears of a US recession may result in some pullback here. After 10-20% correction from the peak, likely, the correction in PSU banks is over. We have started to build positions slowly. Through July, we also built longs in Pharma (Divi’s Laboratories, Lupin, and Zydus Life science), which is doing well. We will cover pharma in detail in our following newsletter. For shorts, we have moved to more tactical positions rather than structural ones and will wait for a decisive turn in the overall market cycle to build structural short positions.

CLICK BELOW TO READ AND LISTEN TO DHIRAJ AGARWAL’S (MD, AMBIT INVESTMENT MANAGERS) INTERVIEW WITH CNBC-TV18.

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