August Blog
Earnings fix everything. Sentiment, valuations, FII flows, macro worries, etc. All of it takes a backseat when the numbers start speaking. And that's exactly what's happening. Q1 is turning out to be the best earnings season in the last 7-8 quarters. The market isn't just trying to break out of a 2-year consolidation; it's breaking out on substance. The way Indian Inc. has handled geopolitical uncertainties, rising raw material costs, crude, and inflation is beyond stupendous.
Here is the earnings snapshot till date:
The good part is, this is a broad-based earnings recovery. Not just mid & small caps (I mean, when was the last time you had seen Nifty 50 Median Revenue growth of 16%) and surely not limited to certain sectors. Almost all the core sectors are participating in this growth. The likes of FMCG, Banks, Autos, Pharma, Defence, NBFCs, Jewellery, Insurance, Power, Cement, Healthcare & more important of them all IT (yes, the reported numbers in IT are surprisingly not as bad as expected).
And this is happening even as the global tech narrative is resetting. The -40% steep fall in KOSPI is good. This has brought sanity to the world AI trade. Investors started to ask questions like ‘Capex is ok, but show me the revenue’.
The excesses have to be removed from the system from time to time. Speed breakers are always better than accidents.
But we have to understand a small difference here. AI euphoria might have paused, but not the transition. Trillion-odd dollars will still pour into AI infrastructure by the Hyperscalers over the next 18-24 months. While India doesn't have a direct play on Memory, GPUs and core AI Infrastructure, we will strongly benefit from the physical Infrastructure like cooling systems, Grid infrastructure, power utilities, wires & cables, etc.
Coming to our individual strategies
Surge India
In July, Surge was down -2.5% as compared to our primary benchmark Nifty 50 TRI at 2.3% & our secondary benchmark Nifty 500 Multicap 50:25:25 TRI at 2%.
Mid & small caps have taken a pause in July after the stupendous rally they had seen from April to June. Large caps took the lead, especially on the back of a strong recovery in IT & Banks.
In this letter, I would like to re-emphasise our investing framework for Surge India. Let's delve a bit further to see how we examine our strategy at any given point in time.
Broadly, our framework revolves around two key metrics:
- Our company's growth potential
This is a core metric for us. Growth is what we seek in our companies. What are the growth triggers? Is the growth sustainable? Is the company capturing market share from competitors, or by expanding the market, etc.?
Growth doesn't mean we like everything showing high Revenue & PAT CAGR. It should be on the back of a strong or improving balance sheet, capable & honest management (as Zakir Khan says, Kaam 19 chalega lekin admi 20 chahiye).
- Market sentiment & sector tailwinds
Everything runs in cycles & we have to accept it. Bear markets can be brutal. Sit with someone who witnessed 2008, 2000, or even better, 1992. Deep drawdowns are painful. We aim to avoid them. Therefore, we need to understand market sentiment and align, at least marginally, with the overall trend.
Market sentiment can be influenced by various factors like interest rates, GDP growth, consumption patterns, FII flow, macroeconomic indicators, geopolitical tensions, etc. Broadly, we expect to gauge if the market is in a Risk-On or Risk-Off scenario.
Market sentiment can also be sector-specific. Any sector expected to have a tailwind over the next 3-5 years. In a Risk-On scenario, investors will be willing to take more risk, hoping for higher returns. On the other side, a Risk-Off scenario is when investors get nervous and pull back, moving their money into safe instruments.
Now, let's represent our portfolio holdings & the overall market sentiment in a 2×2 matrix.
Quadrant 1: High growth potential & strong market sentiment
This is the goldilocks scenario. Our companies are delivering, and the market sentiment or the sector is in a strong tailwind. In this scenario, we will have minimal cash holdings and be fully deployed in our high-conviction names. The market is in Risk-On mode, our holdings are showing growth, and this is the time to put some load on the accelerator, or, to use cricket parlance, aim for a boundary.
Quadrant 2: Strong market sentiment & low growth for the company
This is more of a Wait & Watch mode. This scenario allows some time for our laggards. In other words, the company is not delivering, but since it has a tailwind from the overall positive market sentiment, we can afford to give it more time before we face the risk of PE-derating for the company.
In such a scenario, if we are holding the stock, we will continue to hold. Or if we find any stock worth considering, we will take a plunge with an initial allocation and wait for the earnings to catch up.
Similarly, for the companies we are already holding and for some reason, they failed to deliver or are going through medium-term hiccups, we will give them some more time to get back on track.
Quadrant 3: Weak market sentiment & portfolio companies not delivering
This is arguably the riskiest quadrant, where we risk falling into the trap of cheap or value stocks. It's also possible that we are witnessing a change in the overall market trend or in a specific sector. Bear markets typically start from this quadrant.
In such scenarios, we reduce our allocations, avoid aggressive buying, and prefer to stay in cash. The companies, the sector, or the overall market may appear cheap, but we prefer to stay put. During these times, the cash position will generally be high. Since we don't see any major underlying trends, we will not be in a hurry to redeploy the cash in the markets.
Scenarios like Q3 may eventually evolve into sideways markets or, in some cases, bear markets. Hence, we will wait for opportunities to emerge and spread our investments over time.
Quadrant 4: Weak market sentiment yet strong earnings growth
This phase is characterised by weak markets or sectors, yet there are emerging names within these areas showing decent growth potential. In such cases, we will initiate new positions and increase allocations to core holdings as well.
This is the broad framework by which we manage our portfolio. Of course, we are flexible and ready to adapt our rules when the time calls for it.
We will discuss more about the framework along with our individual holdings in detail in our upcoming webinar on Aug 22nd. You will receive an update on the same from our team soon.
Adaptive Momentum
Momentum is down -3.1% in the month of July as compared to our benchmark Nifty 50 TRI at 2.3%.
Over the last couple of months, we have been seeing Momentum as a factor is coming back. As we speak, Momentum is outperforming the benchmarks on 1M, 3M, 6M & 1Y. However, it is still struggling on a 2Y basis, as the strategy peaked in July of 2024. The changes we made to the strategy seem to be working for now, and I would like to spend a little time on what has changed.
The Revamped Strategy: Key Changes
- Dynamic Momentum Blend: We now combine three distinct momentum lookback models (recent, historical, and equal-weighted). The strategy dynamically shifts allocations between these models based on return dispersion to avoid buying at the end of a trend.
- Stringent Selection Filters: To filter out fragile, short-lived winners, we apply cross-sectional z-scores across multiple periods and strictly factor in proximity to recent highs.
- Focus on Trend Quality: We prioritise persistent, smooth price movements over erratic jumps, discounting stocks that rely on single-day spikes for their returns.
- Volatility-Based Position Sizing: To constrain overall portfolio variance, we allocate larger weights to lower-volatility stocks and smaller weights to highly volatile names.
- Staggered Cash Calls: We replaced the legacy binary cash trigger with a phased de-risking schedule that gradually scales into cash as drawdowns deepen.
In short, we are trying to ride trends that are real and exit ones that are fading, with less whiplash along the way.
Managing Expectations
To be clear, we are not claiming that:
- Adaptive Momentum will not experience periods of underperformance in the future.
- Momentum has become a low-risk factor.
- Three months of live performance is sufficient to call this revamp proven.
Instead, this revamped strategy is designed to make unavoidable windows of underperformance fewer, shorter, and shallower.
Mutual Fund Strategies
Our All Weather Equity strategy crossed ₹300 crores in AUM, quietly compounding money over the last 4 years for investors who wanted to "fill it-shut it-forget it".
All our Mutual Fund and ETF strategies are actively managed and reviewed twice a year. The review involves scoring each existing fund against their category peers on four measures: returns, volatility, risk-adjusted returns, and consistency across rolling periods. A fund is retained if it is within a certain range of the top-ranked fund in its category. This gives good funds room to ride out a rough patch and keeps the portfolio from being churned due to short-term underperformance. Existing money and new money added by you continues to stay invested into the funds retained in the portfolio.
The approach is straightforward: pick a consistent performer, give it enough time to deliver, and if it keeps struggling relative to its category, switch to a better alternative fund in the same category.
In line with this investment philosophy, the portfolio holdings underwent their review in July. Below is our rationale on the changes implemented across both the strategies.
All Weather Equity
- We had introduced Parag Parikh Flexicap Fund when the strategy first started back in 2022, and held it since then as it continued meeting our retention criteria till date.
- HDFC Focused Fund was first introduced into the portfolio in our January 2025 rebalance and was held since then.
- However, both these funds have now fallen out of our retention criteria during this review. Hence our model has triggered a switch to the better-performing funds in their category.
Altitude
In addition to the above funds, Edelweiss Midcap Fund has also been replaced in the Altitude strategy to optimize its mid-cap allocation.
Sale of these mutual fund units may have triggered some exit load and capital gains in your individual account. However, the opportunity cost of holding onto these underperforming funds and then dragging down the performance of the overall portfolio could potentially be much higher than the exit load and tax incurred. We weighed both and concluded the cost of switching was smaller than the likely drag of staying invested in these laggards.
With the changes now live, we recommend considering fresh lumpsum investments and SIPs to take advantage of the refreshed model portfolios.
To Summarize
Markets will always give us reasons to worry. Tariffs, crude, FII flows, geopolitics, etc the list never ends. But when the earnings engine is firing, and the process is clear, you don't need to predict every ball. You just need to know your game plan and trust your preparation.
As Rahul Dravid once said, "Don't look at the scoreboard. Just concentrate on the next ball."
That's exactly what we intend to do. Concentrate on the next ball, back our process, and let compounding do what it does best.
Looking forward to discussing our holdings and the road ahead in detail at the webinar on Aug 22nd. Stay tuned.
Regards,
Krishna Appala
Sahil Jain