The Smoke is Clearing. Maybe.

The world broke a little in the last 2 months & kind of came back in the last 2 days (until the next tweet).

We have seen this before. Not this exact war, not this exact strait, but this maahoal. Markets hate this uncertainty more than they hate the bad news. Bad news gets priced in. Uncertainty just gets into that blanket sell mode (the sequence goes something like, Sell that is profitable, sell that has liquidity, sell anything that can be sold & then finally sell in panic). I think we have passed that sequence & are going through the base formation phase. Not a prediction, just going by the historical market breadth indicators & selling exuberance we are seeing in some counters.

Coming back to the geopolitics:

After a bunch of deadlines & a couple of TACOs later, we now officially have a ceasefire for two weeks. But what is even official nowadays? A lot of noise, proposals, counter-proposals, deadlines that come and go. Both sides are sitting in a position where saying yes first feels like losing face. These things don't resolve over a weekend. They resolve only when the pain of continuing becomes more than the pain of compromising, which looks like it’s happening now.

In this overstimulated, hyperactive, breaking news every five minutes world, I have stopped trying to track who said what to whom. There is only one indicator I trust. We can call it the wisdom of the crowd - Brent Crude. The market for oil doesn't care about press releases or Trump's Truth Social posts. It cares about the actual supply coming back. Watch crude. Everything else is noise. For now, Crude says a ceasefire is a possibility.

So what does this mean for India?

The rupee told the real story, though. Record lows. FIIs sold -1.2 Lac Cr in March & around 26k Cr in Apr (as of Apr 6th). Nifty down over 11% in March (Only 18 other months saw a 10% or worse fall in the last three decades. Let that sink in for a bit).

Fear just went everywhere, the way it always does when nobody knows how deep the hole is. This is normal. It feels abnormal when you are inside it.

But here's what's interesting: the actual companies didn't really break. Auto monthly numbers held. Bank credit seems to have done well in nearly all areas, and both Industrial credit & personal loans are growing at a 12-14% YoY.

The stocks fell, but the businesses just kept doing what they do. The market was selling fear. Companies were getting on with it. A typical bottom-up market, if you may call it.

Are we going to see a V-shaped recovery?

The one-time markets bounced back like a rubber ball was Covid & that happened because every central bank on the planet printed money at the same time. That was an accident, not a policy blueprint. What we are seeing right now is different. This is a supply shock, and supply shocks put central banks in a really awkward spot. Lower rates, inflation wins. Hold rates, growth suffers. No easy answer either way.

So what we expect is more of a consolidation. Market builds a base, consolidates, and then, quietly, before most people even notice, the companies with real earnings start to move first. The broad market follows later.

The Q4 & Q1 earnings damage is more or less already priced in. Market will look through it & shift, from pricing fear to pricing earnings again. That is exactly what we're getting ready for.

Coming to the portfolios now:

Surge India: We were down -9.8% as compared to -11.3% for Nifty 50 TRI in March.

Right now, we are holding ~34% of cash, which we will deploy over the next few weeks/months depending on the market conditions. We continue to like a few names like financials, autos, auto ancillaries, energy, consumption, etc. We are looking for one strong trend to emerge (the likes of previous bull market trends like EMS, value retail, building materials, housing finance, speciality chemicals, CDMO, etc.), which right now we don't have. Once we find the one we are sure to ride; that is where the biggest money will be made.

Our top allocation & high conviction will continue to be towards names like Airtel, BEL, M&M, Belrise, BSE, TVS, ICICI AMC, etc. As of now, we don’t have allocation towards Pharma & IT. Post the recent fall, IT has started to look good & some of the good pharma names are showing healthy growth prospects over the next couple of years. We are looking at some of these names.

We have been conservative since Oct (to move to large caps & cash). This helped us to navigate the last few months with relatively lower volatility. On the cash levels, we will deploy it back mostly in the existing & few new names as well.

New secondary benchmark added: We have also added a new secondary benchmark for Surge India - Nifty500 Multicap 50-25-25 TRI. This Index allocates 50% to Large cap, 25% each to Mid and Small caps. This is the closest to our kind of strategy from the APMI-prescribed benchmarks for the PMS. With this, both our primary benchmark, Nifty 50 TRI and secondary benchmark at Nifty500 Multicap 50-25-25 TRI, we will have a good overview of how the strategy is doing as compared to broader indices in the long term.

Adaptive Momentum: This strategy is down -9.4% as compared to Nifty 50 TRI at -11.3%. The strategy is going through the toughest period it has seen since the 2017-19 period. The Momentum thematic indices were down -25% to -30%. These are tough times & investors have patiently sat through the downcycle in the last 2 years, with the expectation that the upcycle for the momentum factor will come back.

We continue to have conviction in our strategy and momentum as a factor. However, we cannot time the exact turn. We have already made implementation-level refinements to our portfolio construction, but our core strategy of buying stocks that are trending up and selling the ones that are losing momentum stays the same. We still believe in momentum and are focused on making the strategy steadier, more reliable, and ready to perform when markets turn stronger.

Given the current market conditions, we are holding ~45% in cash. Till about three days back, there was absolutely no momentum in the markets. Slowly, we are starting to see the market show some momentum.

On the mutual fund portfolios:

All Weather Equity & Altitude (formerly known as SmartCore): Both strategies continue to perform well and are comfortably ahead of their benchmark since inception. They adapt well to volatile markets, they invest across the best-performing mutual fund categories (flexi-cap, mid & small-cap, focused) and provide necessary balance on the overall portfolio. These are low churn strategies by design & if you are looking to deploy cash but prefer not to take direct equity exposure, these are well-suited strategies for that.

Anchor: Our New MF Strategy

We are launching a new mutual fund strategy called Anchor, designed to deliver stable returns in a tax-efficient manner, with lower risk and volatility compared to a pure equity approach.

Like our other mutual fund strategies, this is rule-based, combining our in-house quantitative shortlisting model with a layer of informed discretion. We will be conducting a webinar to discuss more on this further in the next few days. You will be receiving information on the same.

If you want to get a sense of the thinking behind it before that:

• https://www.capitalmind.in/insights/risk-regret-and-why-your-portfolio-needs-a-buffer-it-will-sometimes-resent
• https://www.capitalmind.in/insights/the-buffer-unpacked-four-hybrid-categories-and-what-they-do

To conclude,

The last few days have been good. Markets moved up nicely, and there is a certain relief in the air. But let's not get ahead of ourselves.

We are not out of the woods yet. In the foreground, you have the war that has a ceasefire but not a conclusion. In the background, quietly sitting there, are Japan yields starting to move and US private credit. Add to that, no real liquidity globally, FIIs who haven't stopped selling, and a rupee that is still weak. Oh, and one random tweet from Trump is enough to undo all of it in an afternoon.

Among all this noise, we will do what we always do: keep our eyes on what actually matters. Q4 results start coming in from next week. That's where the real story is. We take it one day at a time.

Ending this note with a quote from Scott Adams (RIP) that feels especially apt today:

“When a decision involves lots of facts, and we have access to all the facts, we are more likely to hallucinate that we used our powers of reason to reach a decision. But when we recognise that we don’t have all the facts, we hallucinate that we used our gut feeling to bridge the gap. In both cases, we acted irrationally, and we tried to rationalise it to ourselves after the fact. That’s how the Persuasion Filter sees it.”

― Scott Adams, Win Bigly: Persuasion in a World Where Facts Don't Matter.

Riding through the smoke,

Krishna Appala