Multi-Asset Weekly Newsletter

Global Developments & Global Equities

50 BPS FED CUT LIFTS SENTIMENT, RISK ASSETS:

It was a week of central bank rate decisions, the biggest of course being the Fed. The US Fed kick-starts the rate-cut cycle with a
50bps cut. Markets were pricing in a 50% chance of a 50bps cut. However, the Fed delivering a 50bps cut should not be viewed as a signal that:
1) Future rate cuts will be in the same steps
2) There will be a cut at each of the forthcoming meetings (The Fed could skip cutting at some meetings if it feels the need to wait for more data)
3) The terminal rate would be lower The Fed will retain significant flexibility and decide its policy course based on how the economy i.e. labor markets conditions and inflation evolves.

While the Fed dot plot is indicating 2 more cuts in 2024 i.e. 50 bps of cumulative cuts, the market is pricing in 70bps. We believe that the Fed will focus more on labor market conditions rather than inflation in determining its policy actions, as long as inflation is gradually coming off or is stable and not showing signs of heading higher. Jobs report every month, retail sales, and ISM data will therefore have to be tracked more closely than CPI prints. The BoE kept rates unchanged through an 8-1 vote. It in fact announced an active sale of USD 100bn of bonds in a year. BoJ too kept the policy rate unchanged. The market is expecting one more hike from the BoJ this year. PBoC too kept the rates unchanged.

NIFTY V/S GLOBAL MARKETS 

Equities globally did well this week. The Nifty gained 1.7% while S&P500 gained 1.4% and MSCI EM
index gained 2.2%

Domestic Equities

NIFTY OUTPERFORMS AS MIDCAPS FACE OVERVALUATION:

Nifty outperformed the broader markets. Midcap index rose 0.3% while Smallcap index fell 0.4%. High Beta sectors made a come back amid positive risk sentiment. Banks and Real estate stocks outperformed while IT and Pharma stocks
underperformed.

Going forward, equities could be a mixed bag. We could continue to see some correction in broader markets. There are definitely pockets of overvaluation in the Midcap and smallcap space. Benchmark indices may outperform as quality defensives may lend support on sectoral rotation related demand.

Fixed Income, IPO, and Institutional Deals

FIXED INCOME:

Despite the 50bps cut by the Fed, 2y yield at 3.58% was little changed on the week. 10y yield in fact rose 9bps to 3.74%
We may see the yield curve bull steepen. Shorter term rates, up to 1.5 years could drop more than longer end. In domestic fixed income, we could see the yield curve flatten even further. We could see the RBI change its stance to neutral from withdrawal of accommodation in the October policy, now that the Fed has cut rates by 50bps. There is also an outside possibility of a 25bps cut. The yield curve is extremely flat with repo at 6.50% and 10y yield at 6.76%.

PRIVATE EQUITY AND VENTURE CAPITAL:

Several large investments by private equity and venture capital firms this week pushed total investments in Indian companies to their highest level in three months, exceeding $830 million— double the amount from the previous week. Of this, a significant $210 million was raised by the renowned ed-tech unicorn Physics Wallah, now valued at $2.8 billion following its Series B funding round led by Hornbill Capital. Other major investors included Lightspeed Venture Partners, GSV, and WestBridge Capital.

The second largest deal came from Bangalore-based software firm Whatfix, securing around $100 million in a round led by Warburg Pincus, with Softbank also increasing its existing stake as a key participant. 

Furthermore, on the international front G6 Hospitality, the operator of Motel 6 and Studio 6 brands in the U.S., is being acquired by Oravel Stays Ltd, the parent company of Indian travel-tech startup Oyo, from Blackstone Real Estate in an all-cash deal worth $525 million.

REAL ESTATE:

Ivanhoé Cambridge is selling its stake in warehousing assets to its Mumbai-based partner, Macrotech Developers Ltd.

Ahmedabad-based Shivalik Group, which introduced its inaugural real estate fund (CAT 2 AIF) earlier this year, has reached its first close, raising approximately half of the targeted corpus. The fund will invest in residential, commercial, and plotted development projects in Ahmedabad. The group has a robust deal pipeline and is in advanced stages of negotiations for identified opportunities. 

INITIAL PUBLIC OFFERING (IPO):

Fourteen companies, including Arkade Developers, Northern Arc Capital, and Western Carriers, are gearing up to list the following successful IPOs. The Indian IPO market shows a strong outlook, with over Rs 1.5 lakh crore expected to be raised in the coming year, highlighting strong investor demand. Additionally, around 10 new IPOs are slated for launch next week, with Manba Finance and KRN Heat Exchanger drawing the most attention.

FX and Commodities

FOREIGN EXCHANGE:

Dollar weakened against most G10 currencies this week. Commodity currencies outperformed amid positive risk sentiment. Safe havens Yen and Swiss Franc underperformed. Asian currencies strengthened, with THB, IDR, MYR appreciating 0.8-2.2% against the Dollar. Rupee strengthened the most in a week against the Dollar since Dec'23 but still underperformed it's Asian peers.

Dollar may continue to weaken overall against majors. Rupee however is likely to remain a low beta currency. We may see some appreciation towards 83.40. CNH/INR needs to be monitored closely. 11.85-11.90 on the upside is a level above which the RBI does not seem comfortable. On the other hand, if USD/CNH strengthens to break 7 on the downside we may see the RBI become more
tolerant of Rupee appreciation. In that case, we may see the RBI accumulate Reserves less aggressively and let the floor shift lower. Recent August trade deficit print seems a one off. The entire difference between actual and expected prints can be explained on account of a surge in gold Imports due to customs duty cut.

COMMODITIES:

Commodities gained this week on positive risk sentiment. 3m LME Copper contract rose 1.8% to 9476. Brent rose 4% this week to USD 74.50 per barrel. 

We continue to remain positive on precious metals as US real rates move lower and Dollar weakens. Industrial metals and energy complex could underperform on weak China demand.

Ideas and Opportunities

WHAT WE LIKE:

Equities:

Within equities, we prefer staying in the comfort of the Nifty 50 and skew our allocation to defensives. Broader markets could underperform as investors would want to wait for the Q2 earnings to see if the earnings momentum continues to justify the lofty valuations.

FX:

In FX, we see the Dollar weakening overall. Though USD/INR beta to the broad Dollar move may be low, the trend, we believe, will be lower. Exporters can look to add hedges on upticks to 83.70-83.80 in USD/INR. Importers with long-term Dollar borrowings' related FX exposure can look to hedge through carry saving structures. One can look at upticks in USD/JPY towards 145-146 as opportunities to sell the pair. EUR/USD and GBP/USD remain a buy on dips in our view.

We prefer to stay short on USDJPY and keep adding it in the range of 145-147 range. Corporates with import exposure in JPY can hedge their JPYINR exposure.

Bonds:

In Fixed Income, Investors with a 2-3 year horizon can look to add long-duration exposure to the portfolio through GILT funds running an ultra-long duration strategy such as HDFC long duration GILT fund. We do like the idea of borrowing in USD at a floating rate and hedging the FX Risk associated with the same through carry saving structures.

Commodities:

In commodities, we like Long Gold and Long silver trades, both in USD terms and INR terms. Long silver view can be expressed through ETFs and long gold through either ETFs or SGBs.