Mumbai, January 31, 2024: In its annual note, DSP Mutual Fund revealed insights from endurance cycling event Tour De France for a thoughtful portfolio approach in 2024. A winning formula is not about having one correct catalyst but it’s more about a series of contributions leading to the outcome. DSP likens putting together your portfolio as a bit like picking a Tour de France ‘dream team’. You’ll want different riders to support you at various points in the race including a climb through the mountains, as well as on a flat sprint. By diversifying your portfolio across market cap segments, you can help to maintain a balance during different market conditions. But remember that like a cycle through the mountains, the value of investments can go down as well as up.
In India, the strong domestic opportunities stand out as a crucial factor shaping DSP’s long term optimistic perspective on the economy. Despite the overall resilience in high-frequency growth data linked to domestic demand, two areas of concern have emerged recently: the vulnerability of rural demand within the broader consumption landscape and uncertainties surrounding the outlook for private capital expenditure amid the overall investment scenario, which is expected to see revival over time. Given the broad-based economic recovery, the Indian mid and small-cap segments witnessed a notable surge north of ~40%+ in CY23. Another notable feature in CY23 was the rise of public sector enterprises in India. These developments have piqued the interest of investors, prompting questions about the factors propelling this ascent and, crucially, what the future holds for these segments.
Insights from 2023
A year ago, no one could have anticipated the returns the markets delivered in 2023. The global economy proved more resilient than expected, inflation cooled faster than predicted, and companies retained most benefits of lower raw material prices, leading to higher margins. Above all, the positive sentiment for India continued, resulting in increased relative multiples.
Despite being more volatile Mid and small-cap stocks have emerged as long-term winners. Over 5 years (CAGR) Mid-caps (Nifty Midcap 100) returned ~21%, Small cap (Small cap 100) ~18% and large caps (Nifty) ~14% highlighting their resilience and enduring success.
Further, a 5 and 7 year rolling returns analysis for Nifty Midcap 150 TRI Index (midcap) and S&P BSE 250 Smallcap TRI Index (smallcap) gives some interesting insights as follows :-
- On a 7 year rolling basis (Since Sep’12), the midcap index returned over 12% returns 76% times on a rolling basis and has delivered negative returns 0% times on rolling basis.
- Similarly the Small Cap Index on a 7 year rolling basis (since Sep’12) has delivered negative returns only 1.2% times and has shown more balanced matrix across different return bucket, displaying characteristics of being more volatile.
In 2023, mid and small caps have experienced significant run up, good quality and not so good quality– both. DSP’s preference is towards quality midcap as it provides a more effective approach to wealth creation with reduced volatility and fewer drawdowns. Given the current scenario with elevated multiples which seems to be pricing in most good news, sticking to quality companies, understanding business cycles and valuations cycles in each sector becomes increasingly crucial going forward.
The BSE PSU index has delivered a compounded annual growth rate (CAGR) of 28% (including dividends reinvestments) over a five-year period and has risen by approximately 60% in the last year. In comparison, the Nifty-50 index posted a CAGR of 16.7% and 20.5% during similar periods.
While initially cautious about significantly increasing exposure to Public Sector Undertakings (PSU), recent data indicating improvements in operating performance has led DSP to augment its holdings in PSU companies. The selection criteria, however, remain stringent, focusing on companies that meet fundamental parameters. Should these PSU entities sustain efficient operations, a continued trend of outperformance is expected due to increased business opportunities. However, guided by their historical track record, DSP maintains a rigorous approach, maintaining high benchmark for ownership of PSU companies.
India’s Future: 2024 and beyond
A few key trends that are poised to influence India’s trajectory in the next 5-7 years.
Young age population to be key demand drivers: Given the increasing presence of the Gen Z and Gen Alpha cohorts, it becomes crucial to grasp the consumer behavior within these demographics and perceive the world through their lens. This suggests a growing inclination towards heightened demand for online shopping, sustained urbanization, the ongoing trend of premiumization, a continual upsurge in discretionary spending, and a progressive dominance of women consumers in steering demand trends.
While the global challenge of an aging population persists, India remains in an advantageous position with one of the lowest median population ages globally. With this demographic constituting a dominant segment of our population, we can anticipate a continuous increase in the working-age population and growing income levels. This not only ensures stability but also enhances the visibility of sustained growth over the coming years.
Investment– Where are we in the cycle: Investment expenditures have been on the ascent since reaching a trough in 2021. The resurgence of reforms, emphasis on manufacturing, energy transition, and supply chain diversification collectively indicate that the prevailing momentum is poised to endure.
Rise of domestic manufacturing: The Indian government has introduced a Rs. 2.4 trillion incentive package through the Production-Linked Incentive (PLI) scheme. Companies chosen for the PLI are expected to invest approximately Rs. 4.4 trillion over the next five years, potentially creating around 3.7 million jobs. Apple is set to shift 5% of its global production for the iPhone 14 to India later this year and aims to manufacture 25% of all iPhones within the country by 2025. India is steadily developing robust manufacturing capabilities, enabling an expansion of export prominence. This development is favorable from a current account standpoint and signifies a potentially less volatile currency.
According to DSP, while India does offer an exceptional long-term investment opportunity, investors should however remain vigilant considering a shifting landscape marked by decelerating global growth, rising global interest rates, persistent near-term dollar strength, and heightened geopolitical uncertainties. While India, with its primarily domestically driven growth, is expected to be relatively less susceptible to global macro risks in this changing environment, expectations need to be appropriately set for the current year on back of rich valuations.
“ At DSP Mutual Fund, we recognize that there will years where ‘value’ will deliver better outcomes compared to ‘growth at a reasonable price’. There will also be years where some sectoral themes will deliver significant alpha. Our role, like a team in Tour de France, have varied talent to achieve the ultimate objective – deliver consistent, risk-adjusted long term returns for our unitholders. Our goal remains – improving financial outcomes for our 3.5 MN existing investors while also welcoming new ones who can benefit from our simple and disciplined approach to achieving their financial goals,” says Vinit Sambre, Head – Equities, DSP Mutual Fund.
