10^th May 2022

Month gone by

The first quarter of the year was difficult for investors and April proved no different. The war in Ukraine, lockdowns in China and the prospect of substantially tighter US monetary policy all weighed on sentiment. Markets had plenty to worry about before the invasion, including the onset of U.S. Federal Reserve (Fed) tightening, the impact of COVID-19 lockdowns on supply chains and inflation and the outlook for China with problems in the real estate sector, its zero-tolerance COVID-19 policy and heavy-handed regulation of technology firms. FIIs continued to remain net sellers of Indian equities in April (-$3.4bn, following -$3.7bn in March). This marked the 7th consecutive month of net equity outflows for FIIs, with YTD outflows of $16.9bn. DIIs recorded inflows of $4.1bn in April, maintaining the buying trend observed since March 2021. Mutual funds and Insurance funds were both net buyers during the month. Nifty end the month with (-2.1%), Nifty Midcap 150 (+0.9%) and Bse Small cap 100 (+0.4%) outperformed the versus its larger peer.

Macro

In its off-cycle MPC meeting, RBI surprised with a Repo rate hike of 40bps to 4.4%, after a gap of almost 24 months. GST mop-up at an all-time high at Rs 1.68lakh crore in April v/s Rs 1.42lakh crore in March. March CPI rose further, coming in at 7% ahead of expectations. February’s Industrial Production also continued to improve (+1.7% YoY; +1.4% MoM). Trade deficit continued to stay high and widened to US$20 bn in April from March levels. Exports in April grew 24% YoY to US$38.2 bn even as they fell by 9.5% mom (March: US$42.2 bn).

Geo-Politics

Russia’s invasion of Ukraine creates near-term risks for markets. The immediate threat comes from high energy prices, rising food prices and disrupted supply chains. The longer-term issues are a new cold war between Russia and the West, increased military spending and a further blow to globalization. The war is a defining moment for Europe, which now needs to unwind decades of Russian energy dependence, accelerate its sustainable energy transition and rebuild military capability.

Sectoral Performers

Top gainers in the sectoral space were Utilities (+18%), FMCG (+6%), Auto (+5%), Oil & Gas (+4%), PSU Bank (+3%) and Industrial (+2%). While Metals (-3%), Telecom (-4%) and Information Technology (-12%) underperformed the benchmarks.

Global Markets

Global equities declined by 8.1% in April. Geopolitical crisis and policy tightening continue to remain an overhang. Markets have been absorbing significant macro and geopolitical shocks amid an aggressive central bank pivot. Among the key global markets only Indonesia (+3%) closed higher in local currency terms. India (-2%), Spain (-3%), UK (-4%), China (-4%), France (-6%), Italy (-7%), Germany (-8%), US (-9%), Japan (-10%), Taiwan (-10%) and Brazil (-15%) all ended lower.

View

The outperformance of Indian markets relative to global markets continued in Apr’22. Since Jan’21 the divergence in performance between US and India has been eye-popping. Given that Apr’22 witnessed large FII outflows, the strength of Indian retail flows – direct as well as through Mutual Funds was the fulcrum on which this performance was achieved. Over the longer term, earnings growth usually sets the pattern for the market. On that front, the early results, though a mixed bag, are not reporting anything alarming. While earning estimates may be cut for FY23, estimates for FY24 are still largely intact. Aggregate earnings may not appear to have changed much, as upgrades will be limited to a few sectors – Oil & Gas; Metals; Utilities & Autos the quantum of these upgrades will be equal to or higher than the cuts across a swathe of sectors like consumer staples; discretionary; pharmaceuticals; engineering; EPC, in short users of commodities. We continue to believe that the elevated commodity prices could lead to demand shrinkage, which can have a material impact on the market move, going forward. The End of Season Sale in Indian markets has started, it’s time to pick the best brands at a good price.

Pessimism is smart?

The human brain has a natural tendency to give weight to (and remember) negative experiences or interactions more than positive ones—they stand out more. Psychologists refer to this as negativity bias. “Our brains are wired to scout for the bad stuff” and fixate on the threat, says psychologist and author Rick Hanson.

"For reasons I have never understood, people like to hear that the world is going to hell," historian Deirdre N. McCloskey. It's hard to argue. Despite the record of things getting better for most people most of the time, pessimism isn't just more common than optimism, it also sounds smarter. It's intellectually captivating and paid more attention to than the optimist who is often viewed as an oblivious sucker.

It's always been this way. John Stuart Mill wrote 150 years ago: "I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage." Matt Ridley wrote in his book The Rational Optimist:

If you say the world has been getting better, you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize.

Negativity sells easily in this business and positivity is taken for granted

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Why?

The below two quotes of Daniel Kahneman sums it up, “people respond stronger to loss than gain” & "Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce." Here are a few other reasons why pessimism gets so much attention.

• Optimism appears oblivious to risks, so by default pessimism looks more intelligent. But that's a wrong way to view optimists. Most optimists will tell you things will get ugly, that we'll have recessions, bear markets, wars, panics, and pandemics. But they remain optimistic because they set themselves up in portfolio, career, and disposition to endure those downsides. To the pessimist a bad event is the end of the story. To the optimist it's a slow chapter in an otherwise excellent book. The difference between an optimist and a pessimist often comes down to endurance and time frame.

• Pessimism shows that not everything is moving in the right direction, which helps you rationalize the personal shortcomings we all have. Misery loves company, as they say. Realizing that things outside your control could be the cause of your own problems is a comforting feeling, so we're attracted to it.

• Pessimism requires action, whereas optimism means staying the course. Pessimism is "SELL, GET OUT, RUN," which grabs your attention because it's an action you need to take right now. You don't want to read the article later or skim over the details, because you might get hurt. Optimism is mostly, "Don't worry, stay the course, we'll be alright," which is easy to ignore since it doesn't require doing anything.

• Optimism sounds like a sales pitch, while pessimism sounds like someone trying to help you. And that's often the truth. But in general, most of the time, optimism is the correct default setting, and pessimism can be as big a sales pitch as anything – especially if it's around emotional topics like money and politics.

• Pessimists extrapolate present trends without accounting for how reliably markets adapt. That's important, because pessimistic views often start with a foundation of rational analysis, so the warning appears as reasonable as it is scary.