The mid point
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This is rather odd timing wise for an investment update.
Why?
We just crossed the year’s half way mark
Macros remain bleak and uncertain
There is no end in sight for Ukraine-Russia
The Fed (and US government) spent most of its time since February preaching hawkishness
Other major central banks are piggy backing on the resulting sentiment and raising rates globally
Equity markets are spooked in general. Tech stocks in particular
And all this is happening in midst of the monumental clash.
The narrative on “post pandemic recovery” vs. “real world” inflation
With the latter rather accentuated.
All thanks to changed geopolitics of Europe and Indo-Pacific.
But perhaps that’s what makes it a perfect time to introspect on what’s behind us and what’s in store for the future.
Performance
Our 2 (and a half) year old portfolio of 50+ holdings reaped 21.5% in XIRR terms, maintaining a relatively cheap Price Earnings (PE) of 18.92…hopefully indicating a high chance of multiples re-rating, supported by earnings growth in the future.
This is obviously assuming our view on the strength of the fundamentals holding ground.
This performance represents only our active positions. Adjusting for any partial/full exits (20 holdings sold completely to-date) with all proceeds reinvested, the XIRR jumps to 31.3%.
While a 2 (and a half) year performance can hardly be tagged as track-record, we are content (with a pinch of circumspection) that directionally the portfolio is on the crux of imminent uptick of sorts.
Holding spread remains even with roughly one-third each across large cap, midcap, and small cap, and marginal exposure to gold ETFs.
Financial services (15.3%), IT (12.4%), and Materials (11.42%) comprise Top 3 sectors by revenue, with Engineering and Capital goods coming at a distant 4th (4%).
Top 3 performers have been BORORENEW (+123% XIRR), WELSPUN (+131% XIRR), and ASHOKLEY (+187% XIRR). Bottom 3 performers are TANLA (-51% XIRR), SIGACHI (-42% XIRR), and KPITTECH (-38%).
Geographical diversification remains low, with portfolio over exposed to India and other neighboring countries in Asia. However, that is by design.
There is clear outperformance vs. Nifty 50 (+15% points), Nifty 100 (+16% points), Nifty 500 (+15% points), and Nifty Midcap (+12% points).
2021 themes
2021 was characterized by a record equity rally thanks to excess liquidity support of major central banks in a system hit by a sudden and unprecedented pandemic driven demand pause.
Indian markets were no different with Nifty 50 up +24%, Nifty 100 up +25%, Nifty 500 up +30% y-o-y and average PE of the benchmark index at 31x, a 20 year high. A record 63 IPOs were launched to raise c. $16bn worth of capital. Private markets roared with VC/PE flows hitting a decade high at $74bn, 3x increase vs. 2020.
We were thankfully suspicious of the frothy valuations and resisted from doing any buys at listing.
The below truism from Warren Buffett resonated at its core:
The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, the animal spirits are rising, that that’s going to better than 1,000 other things I could buy where there is no similar enthusiasm … just doesn’t make any sense…
What we did do was expand our focus beyond zero leverage large cap opportunities towards the small cap and midcap universe. This realignment was coupled with periodic rebalancing to ensure the actual holdings reach closer to the mean, ensuring we are equally diversified across stocks.
Three waves of momentum driven sales were executed to book profits. This automated selling discipline (sell when there’s >5% month on month growth for 3 months in succession) ensured that when a particular stock got too frothy due to market moods (which many did), we can book some profit and reinvest hopefully at a more sustainably high hurdle rate.
Enter 2022
We now see a change in narrative.
Concerns around Omicron’s potential negative impact, both human and economic, were thankfully overplayed leading to a collective sigh of relief and anticipation of a much awaited post pandemic recovery by the end of January. Russia however decided to play spoil sport in February, leading a vicious and unexpected invasion of Ukraine. Global supply chains were instantly hit affecting a wide variety of agricultural commodities (wheat, edible oils, barley, corn), energy sources (crude oil, natural gas), and metals (copper, nickel). That coupled with a demand recovery led to inflationary pressures hitting sky-high, with retail inflation exceeding RBI’s mandated threshold (6%) for five months running come May and wholesale inflation hitting double digits.
The days of liquidity seem truly behind us. RBI hiked repo rates by 40 bps in May and 50 bps in June. US Tech stocks crashed with NASDAQ dropping 19% over 4 months. Private market VC/PE flows dried up in Q4 of FY22.
Risk off is back.
There is a clear shift towards metals, commodities, and infrastructure (PNCINFRA, ACC, AWHCL, TATACOFFEE, ONGC, WELCORP) and away from Technology and Consumer discretionary.
We re-geared again towards large caps (TCS, DRREDDY, and RIL) and took some exposure to Gold ETFs to de-risk.
Recent IPO issuances began to finally look attractive, with many available at less than half their issue price.
We also did much needed soul searching and sold holdings with overhanging corporate governance concerns and regulatory uncertainty to cap losses (e.g., HEROMOTOCO and RELIGARE).
Way ahead
For the first time since we started deploying capital, one is at a point when the portfolio is spread evenly across sectors and market cap segments. With our dry powder expanding in the earlier part of 2022, we had a chance to buy many fundamentally sound opportunities at a relative discount due to macro headwinds. We have tracked Q4 results for the entire portfolio and would categorize most in buy and accumulate bucket in the medium term, with select riskier (albeit multi-bagger potential names) under our watchlist.
With most market commentators estimating the down cycle is close to bottoming out, we stand at a great vantage point to sit tight, almost wear a passive hat, and track performance.
Christopher Wood, Global Head of Equity Strategy at Jefferies recently remarked:
For 1st time in more than 40 years, there is pressure from the political establishment on the Fed. However the real question is that with the Fed so behind the curve, would they change their tack later in the year?
India’s central bank i.e. the RBI is also behind the curve…but nowhere as far behind the curve as the Fed
India is a great story. With a 10 year view
👀🙈
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.