Xi refuses to sign off lopsided trade agreement

China has all the cards in its pocket, and Trump is caught in a trap created by himself. The U.S. would maintain 55% tariffs on Chinese goods, while China would keep a 10% tariff on U.S. goods.

 The terms have been refused.       

U.S.-China trade talks in June 2025 followed a period of heightened tensions, with tariffs escalating to triple-digit levels (e.g., 145% on Chinese goods, later reduced to 55%, and 10% on U.S. goods entering China). A preliminary agreement was reached in Geneva in May 2025 to pause further tariff escalation for 90 days, followed by marathon talks in London in early June 2025 to establish a “framework” to ease trade tensions.

China’s De-Americanisation Strategy: “Delete America”

China agreed to supply rare earth minerals and magnets, critical for U.S. industries like electric vehicles and defence, in exchange for the U.S. allowing Chinese students to continue studying at American universities.  This is not accepted by Mr.Xi.  Chinese businessmen are becoming independent in their trade in terms of less dependency on the U.S. Chinese companies say they are replacing overseas suppliers with China-based ones to “localise” their supply chains and push out imports—a trend given extra impetus by the trade conflict with the U.S. Chinese business men are now using the word -Delete America. This is a massive and major change that will be reflected in the coming days in business and trade. Supply chain changes will be huge, which will create long-term issues for the U.S only.

China is reallocating away from U.S. debt toward other assets to diversify its holdings.  China began unloading Treasuries opportunistically over the past 12 months, culminating in the $170 billion drop.   The reduction speed picked up during periods when the U.S. Treasury auctions were oversubscribed, making it easier for China to offload without disrupting the market. China’s total U.S. Treasury holdings dropped from over $1 trillion to just below $800 billion, making it no longer the second-largest foreign holder of U.S. debt—Japan has taken the lead. This is the most significant drawdown of U.S. Treasury holdings by China since 2010–2011, signalling a fundamental shift in strategy, not a temporary adjustment.

Conclusion

Now, as Mr. Xi refuses to sign the agreement, we will witness more negotiation and broader trade issues in the coming days. China’s cautious statements and Xi’s strategic approach suggest he may be withholding approval pending better terms, leveraging China’s rare earth dominance. But the Chinese leadership has no interest in filling America’s shoes. Attempting to do so could cost China dearly just when it is undertaking a broader economic reorientation at home.

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Don’t get shocked that Retail Participation and Behavioural Patterns

Small-cap mutual funds have gone through a volatile ride, with many witnessing massive outflows, according to industry voices like Mr. Naren.  Does the current phase of the market completely discount allocation in a small-cap fund?  Should you avoid still while allocating in small-cap Funds?

The small-cap mutual fund category, long considered a fertile ground for high-growth investment, has once again proven to be both an opportunity and a cautionary tale for investors. The correction that began in late September 2024 was significant and swift. Small-cap funds saw a sharp 22% decline, more pronounced than in mid-cap (20%), multi-cap (19%) and large-cap (17%) categories.  The correction that began in late September 2024 was significant and swift. Small-cap funds saw a sharp 22% decline, more pronounced than in mid-cap (20%), multi-cap (19%) and large-cap (17%) categories.

 Over the past nine months, small-cap funds have undergone a dramatic cycle of decline and recovery, offering critical insights into their risk-return profile, investor behaviour, and fund management strategies. This period, stretching from September 2024 to June 2025, has served as a live case study in market dynamics, valuation sensitivity, portfolio construction, and the psychology of retail investing.

Nifty Smallcap 250 bottoming out on February 28, 2025. The revival was driven by several converging factors: attractive valuations post-correction, strong GDP growth data, and renewed flows from domestic institutional investors. The price-to-earnings (PE) multiple compression, from 32 in September 2024 to 26 in March 2025, signalled value, prompting investor re-entry.

Small-cap funds bounced back stronger than their larger peers, delivering 22% returns between March and June 2025, ahead of mid-cap (21%), flexi-cap (16%), and large-cap (15%) categories. Sectoral indices such as Nifty India Defence, Nifty Capital Markets, and BSE Capital Goods staged dramatic rallies, with returns ranging from 29% to over 70%.

Don’t get shocked that Retail Participation and Behavioural Patterns

The number of small-cap folios grew by 29 lakh to touch 2.5 crore between September 2024 and May 2025. This increase was partly driven by recency bias—investors attracted by recent high returns despite underlying risks. However, the inflow of ₹36,372 crore during this period underscored confidence in India’s growth story and the perceived long-term potential of small-caps. In fact, advisors might be late, but clients have become more aggressive in the last 9 months while investing in the category. The current war situation of Iran and Israel, and all other geopolitical hiccups, provides an opportunity for investing in the category for the long-term wealth creation.

Key Takeaways for Investors and Advisors

1. Valuations are not just academic—they are the primary determinant of forward returns. Buying into euphoric markets can lead to steep drawdowns.
2. Small-cap investing requires patience and a risk appetite. Investors must brace for sharp corrections and should avoid overexposure.
3. Diversification is a double-edged sword—while it mitigates downside, it can also erode outperformance if overdone.
4. Fund selection matters—schemes with a disciplined investment approach, a focus on quality, and prudent risk management outperformed peers.

The last nine months have been a powerful reminder that small-cap funds, while rewarding over the long term, are inherently volatile. The correction tested investor patience, and the recovery rewarded conviction. For investors and advisors alike, the key lies in understanding the nature of the asset class, maintaining a long-term view, and aligning allocations with both goals and risk capacity.

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AMFI Eases Trail Commission Rules for Lapsed ARNs

 

The mutual fund distribution ecosystem in India has witnessed a pivotal shift with the Association of Mutual Funds in India (AMFI) revising the commission forfeiture norms linked to the non-renewal of ARN (AMFI Registration Number). This development is particularly significant for Mutual Fund Distributors (MFDS), many of whom have expressed concerns over the rigid forfeiture framework that prevailed until March 2025.

Key Changes Effective for ARN Expiring After April 1, 2025

1. Partial Commission Forfeiture Instead of Full Forfeiture

• Earlier Norm: If ARN was not renewed within 3 months of expiry, the entire trail commission—even for business built before expiry—was forfeited.
• New Norm: Only the commission earned during the non-compliant period (post 3-month grace) will be forfeited.
• Example:
• ARN expiry: March 10, 2025
• Renewed on: August 10, 2025
• Trail commission from March 11 – August 9 will be forfeited.
• Commission on AUM till March 10 will be repaid upon renewal.

2. Clarity on Commission Payable

• If ARN is renewed within 3 months, all withheld commissions are fully released.
• If renewed after 3 months, commissions from the non-compliant period are forfeited, but trail from assets built before expiry will be repaid.

3. Investor Communication Requirement

• AMCs must notify investors in writing if the MFD's ARN has expired and not yet renewed.

 ✅ Implications for MFDs

• Reduced loss of income from trail commissions due to procedural delays in ARN renewal.
• Business continuity and improved distributor retention, especially for small and individual MFDs.
• Reinforces the importance of timely ARN renewal but adds a layer of fairness and flexibility.

Conclusion

AMFI’s decision to relax the commission forfeiture norms for non-renewal of ARNS reflects a pragmatic and inclusive approach to regulatory governance. By ensuring that MFDS retain trail commissions on business procured before ARN expiry—even in cases of delayed renewal, AMFI has addressed a long-standing concern with sensitivity and foresight. These changes will not only improve financial continuity for MFDS but also foster trust and stability across the distribution network. Importantly, the policy retains accountability by maintaining forfeiture for the period of non-compliance, thus reinforcing the importance of timely renewal. As the mutual fund industry continues to grow and deepen its retail reach, such responsive policy shifts are essential for empowering distributors and supporting long-term investor engagement.

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BLOCKCHAIN & BITCOIN will be playing Big role in U.S Government

  

The world of audit and accounting is about to witness a sea of changes in the coming years. Well, I might be late in writing but Blockchain and Bitcoin are now part of the U.S. government policy framework and parking facility. Yes, there is dramatic change happening in the world of Bitcoin where a significant policy framework is getting into play. The idea of putting all U.S. government spending on a blockchain is definitely bold and would revolutionize transparency, accountability, and efficiency. If implemented correctly, it could reduce fraud, streamline audits, and increase public trust in government spending. However, there are also challenges—scalability, privacy concerns, and resistance from entrenched interests who benefit from the current system.

 In a world increasingly driven by technological innovation, government transparency remains one of the most pressing challenges. Recent proposals by Elon Musk and Coinbase CEO Brian Armstrong to place all U.S. government spending on blockchain could be a game-changer. With the U.S. government spending an estimated $6.9 trillion annually, moving these transactions to a decentralized ledger could provide unparalleled security, transparency, and efficiency. While resistance is expected from those who benefit from the current inefficiencies, implementing blockchain technology could eliminate waste, reduce fraud, and help rein in deficit spending. Moving all US spending to the blockchain would reduce fraud in the US Treasury's budget from 24% to 0% overnight. Even if just 1% of US spending goes to waste each year, that's $69 BILLION per year. Cutting 5% would save $338 billion, or 19% of annual deficit spending

 The Benefits of a Blockchain-Based Government Ledger

1. Enhanced Security and Fraud Prevention

Currently, U.S. government spending records exist in an append-only format that makes it difficult to track and verify individual expenditures. Blockchain technology would enable automatic tracking of transactions and real-time fraud detection. For instance, a recent investigation uncovered 62 contracts worth $182 million dedicated solely to "administrative expenses," including $168,000 for an Anthony Fauci exhibit at the NIH Museum. With blockchain, such expenditures would be easily flagged and reviewed.

2. Greater Transparency and Public Accountability

Government spending databases are notoriously difficult to navigate, making it nearly impossible for taxpayers to scrutinize spending. Blockchain technology would allow instant searches and tracking of expenditures, giving the public a clearer picture of where their tax dollars are going. In a time when government trust is at an all-time low, blockchain adoption could restore faith in public institutions.

3. Reducing "Ghost Beneficiaries" and Fraudulent Payments

One of the biggest financial inefficiencies in government spending is improper payments to ineligible recipients. In 2022 alone, improper Social Security payments amounted to $13.6 billion. Blockchain could eliminate these "ghost beneficiaries" by ensuring that aid programs, pensions, and Social Security payments are only made to verified and eligible individuals. Smart contracts could automate verification processes, significantly reducing fraud and administrative costs.

4. Cutting Unnecessary Spending and Deficit Reduction

If the U.S. government wants to eliminate deficit spending, it must cut $5 billion in spending per day. Currently, the government spends 44% of GDP per year—the same levels seen during World War II. By bringing inefficiencies to light, blockchain could help policymakers make better decisions on spending cuts. A recent analysis found that $322 billion of taxpayer money has gone to various 501(c)(3) organizations, with a total of $724 billion in government contributions. Greater transparency would allow taxpayers to question these expenditures and demand accountability.

5. Automated Audits and Cost Savings

Blockchain technology could streamline financial audits by automating tracking and verification processes. Currently, audits require extensive manual labour and are often conducted long after the spending has occurred. With blockchain, audits could happen in real-time, preventing waste before it happens. Many large banks and corporations have already implemented blockchain solutions for cross-border transactions, with 56% of businesses integrating blockchain into their operations as of 2024. The U.S. government could benefit from the same efficiencies.

Conclusion

At the same time, one will find resistance, particularly from those who enjoyed inefficiencies  The proposal to place all U.S. government spending on blockchain could transform the way taxpayer money is tracked and managed. By ensuring security, transparency, and efficiency, blockchain technology has the potential to reduce waste, eliminate fraud, and help curb deficit spending. While resistance from entrenched interests is inevitable, the long-term benefits far outweigh the challenges. As technology continues to disrupt traditional governance, those who embrace change—both policymakers and investors—stand to benefit the most.

Very soon other countries will adopt and at the same time many countries and many government departments and employees of the U.S. will feel the hit of such transparency and audit mechanism.  By 2030, Deutsche Bank estimates there will be over 250 MILLION blockchain wallet users.

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What does Numbers say on Small & Midcap Investing now?

 

There is a huge debate on whether the current correction in small-cap and midcap is an opportunity to invest and make gains from the same. Well, the motive is correct but the expectation or rather aspiration of returns are too high. The valuation landscape for Indian small caps and midcaps in early 2025 presents a mixed picture, balancing between high growth potential and concerns over valuations. Remember every correction is not a buying opportunity and even if it is so one should have revised down return expectation. The valuations of the segments give a clear indication that it is time to stay away since the dust has yet to settle.

 Small Caps:

• Valuations: Small caps in India have been trading at significantly higher valuations compared to historical averages. For example, the Nifty Smallcap 100 index's Price-to-Earnings (P/E) ratio was noted at 33 in early 2025, indicating a premium over its long-term average, which is typically below 15 times.
• Performance: Despite these high valuations, small caps have shown substantial returns, with some stocks experiencing dramatic rises. However, there's a cautionary note on the sustainability of these valuations, with analysts suggesting that not all small caps are at fair value, and many might be overvalued.

 Mid Caps:

• Valuations: Midcap valuations have also been stretched, with the Nifty Midcap 150 index at a P/E of 41.48, far above what's considered reasonable for long-term investment as of January 13, 2025. For the Nifty Midcap 100, the P/E ratio was around 40, indicating that investors are paying a premium for these stocks compared to historical averages.
• Historical Comparison: Historically, midcap valuations have been considered reasonable around the mid-20s or lower for P/E ratios. However, recent data suggests that these valuations are well above this range, with some analysts pointing out that such high P/E ratios could indicate overvaluation or market exuberance
• Performance and Expectations: Midcaps saw a notable performance in 2024, with indices like the Nifty Midcap 100 doubling from January 2023 levels by early 2024. However, this has led to concerns about overvaluation and potential underperformance in 2025 as investors expect a correction or consolidation.

• Earnings Growth: While there's an expectation of moderate earnings growth for small and midcap companies in 2025, the high base from previous years and lofty valuations could lead to market consolidation rather than continued sharp rises.

Now lets get into the Price to Book value analysis.

Small Cap Index

• Nifty Smallcap 100: The P/B ratio for this index has been notably high, reflecting a market where investors are willing to pay a premium for small-cap stocks. As of early 2025, the P/B for the Nifty Smallcap 100 was around 4.49, which is significantly above historical averages where a P/B ratio below 2 is often considered more reasonable for small caps. This high ratio suggests that the market might be pricing in significant future growth or that there's a risk of overvaluation if expectations are not met.

 

Midcap Index:

• Nifty Midcap 100: Similarly, midcaps have shown elevated P/B ratios, with the Nifty Midcap 100 standing at around 4.67 in January 2025. This is also above what might be considered a normal valuation for midcaps, where a P/B between 2 to 3 is often seen as fair value. The high P/B suggests that investors are betting heavily on future growth or are perhaps ignoring traditional valuation metrics in favour of growth narratives.

• Valuation Concerns: Both small-cap and midcap indices are trading at P/B ratios that are above historical norms, which could be a red flag for investors looking for value. However, these valuations might be justified if the companies within these indices continue to grow earnings at a pace that supports such valuations.

In summary, while Indian small and midcap stocks have seen significant growth and offer potential for higher returns, the current valuations suggest a need for caution. Investors are advised to be selective, focusing on companies with solid fundamentals and reasonable valuations amidst the broader market's high expectations and potential for correction. Given these high valuations, investment advice has leaned towards caution, recommending selectivity in choosing midcap stocks, focusing on those with strong fundamentals, growth potential, and perhaps those trading at lower P/E ratios within the midcap universe. Diversification and a long-term investment horizon are also emphasized due to the risk of valuation corrections.

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Time to Reduce Expectation-

 

If you are expecting a return of 25% or 30% from the markets in this CY 2025 or FY -2025-26 will reduce your expectations otherwise your investments will take a major hit. The behavioural aspect of the investors has changed dramatically in the last 4 years when the markets made a way journey and more than that investors were doubling their investments within weeks and months. One of the difficult phases for the Financial advisors will be that investors will have huge return expectations and challenges in making them understand how to ride when the market is volatile.

The 18.5 cr demat account holders came into the Indian markets with the mindset that they want 25 to 30% returns within 3 months and that’s too from their stock selection. The same expectation has been built on the Mutual Fund side too where short-term returns of around 20% could be made in 6 months. SIP gross numbers also grown in the last 4 years SIP were positive and were showing healthy returns.  The IPO market was a stellar performer in CY 2024 and people bet their funds without knowing much about the companies and just chasing short term. The most surprising part is that out of these 18.5 cr demat account holders, 90% are focussed and believe that Micro Cap, small will make more money rather large cap and midcaps. Well, these investors are bound to take a massive hit so as their financial advisors called Equity Dealers.  

The biggest battle for the investors and financial advisors is re-alignment towards the expectation of the return compared to what they achieved in the last 4 years. The below chart speaks loudly about how the behavioural aspect of the investors will be challenging for investing. In many places, investors have created liabilities based on the flow of income from the capital market based on the short-term returns being generated. This is another place where a blow is yet to be discovered.

Many investors are under the hope that the recent correction in small caps and micro caps is an opportunity to buy. Well, the opportunity exists but not the return expectation married with the historical time frame. That is the lag where investors and both advisors will get stuck. Valuations coming down and stock prices looking cheap is always an opportunity for investing for creating long-term wealth but does that match with the expectation for returns compared to what we all got in the last 4 years? This is a wide gap.

•  Nifty Midcap 150: Strong performance in YTD 2024 (24.5%) and 1Y Return (23.8%), showing resilience even in December 2024 (1.12% gain).
• Nifty Midcap150 Momentum 50: Outperformed in YTD returns at 32.3%, with a strong 1Y Return of 31.6%. Momentum strategies in midcaps have clearly been beneficial.
• Nifty Smallcap 100 and Nifty Alpha 50: Posted strong YTD returns of 24.9% and 33.9%, respectively, reflecting robust performance in smallcap and alpha strategies.

Smallcap Focus:

• Nifty Smallcap 250: Moderate gains in December (0.20%), but solid YTD return of 27.2% and 1Y Return of 26.4%, showcasing a favourable environment for smallcap investments.
• Nifty Smallcap250 Quality 50: Quality-focused smallcaps delivered YTD 27.5%, maintaining a steady 1Y Return (26.5%).

In 2024 we found Nifty Next 50 and High Beta and other segments where Investors have deep trust and moved ahead to make wealth.

•  Nifty Next 50: Among the biggest laggards in December (-3.80%), despite a strong YTD return of 28.4% and 1Y return of 28.2%. This discrepancy might indicate short-term pressures in December 2024.
• Nifty 50: Declined 2.02% in December, with YTD and 1Y returns of 10.1% and 10.0%, respectively—highlighting its defensive nature but underwhelming compared to midcaps and small-caps.
• Nifty High Beta 50: Affected heavily by December's 4.76% decline, leading to a 1Y Return of just 4.3%, demonstrating its sensitivity to market volatility.

Among all these havoc and volatility one segment that went truly winner due to its structural segment was Momentum and Alpha Factors.

• Momentum strategies like Nifty Midcap150 Momentum 50 (32.3% YTD) and Nifty500 Momentum 50 (27.2% YTD) were clear winners.
• Alpha strategies (e.g., Nifty Alpha 50) delivered robust results (33.9% YTD, 27.6% 1Y Return).

Wealth advisors have also chased PMS and AIF investments and unlisted shares along the same lines.  5 years funds were exited within 2 years and wild goose churning was part of the practice of the wealth advisors. Now that era is also over.

Now comes the biggest question how much return is expected from the market in CY 2025 or FY-2025-26? Bring down your expectation and match it with the last 20 years' return of the markets and one can expect 200 to 300 bps more over and above that return. We need to understand that we are not chasing valuations, price fall, or quality improvements. We are chasing 25% to 30% returns in months, quarters or even weeks.

Do you when the SIP net number will decline and gross the numbers too? Once you witness the SIP getting into negative returns. The irony of all investments made during the last 4 years has been the return and tenure and have nothing to do with valuations or asset class or within  asset class equity segments.

What actions did Mr Trump take, well he only knows but currently, import prices for India have gone up and export markets are awaiting for shift in supply chain conditions to be created by a tariff war. Financial Influencers also need to bring down the expectations of the investors since they have played a tremendous role in growing the greed and converting the behavioural aspect of investors.

The biggest pain every financial advisor will face along with investors is to re-adjust and re-align with the expectation of the return and that is a trap that every investor under the disguise of falling prices and declining valuations will get into.

It is time to calm down on return expectations and stop chasing the wild goose.

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Good for India & bad for George Soros Firm

No Introduction is required for George Soros but you will need an introduction for his touch days ahead. Mr. Trump's win will create potential political and financial challenges for George Soros and his network might face Soros. He has messed up with the wrong person and now he will face the heat of the same. His actions against Trump will be paid back by the latter.

He is a prominent liberal philanthropist, and the beauty is that he has consistently opposed Trump and his policies, using his influence and financial resources to support Democratic campaigns and progressive causes. He has started his actions beforehand before Mr Trump gets into action.

Soros Fund Management’s decision to close its Hong Kong office suggests a strategic reorganization amidst uncertainty. This could be in response to political shifts and changing investment priorities. Despite significant financial support for Democratic candidates through entities like Future Forward PAC, the Soros family’s efforts to prevent Trump’s return seem to be faltering. The Soros-backed campaign against MAGA Republicans hasn’t yielded the expected results. Meanwhile, the campaign by the elder Soros and his son Alex to keep a Democrat in the White House has failed to pay dividends, despite the Soros’ Fund for Policy Reform’s transfer of $60 million to Future Forward, a pro-Democrat dark money super PAC. That’s on top of a $15

Along with money, the Soros family invested significant personal capital into the campaign against “MAGA-style Republicans” in 2024

 The Open Society Foundation (OSF), which Soros chairs, has shifted its focus from its traditional international efforts, including Europe, to primarily concentrating on Ukraine and U.S. domestic politics. This pivot indicates how central the effort to block Trump’s presidency has become for Soros's prime purpose. Soros has a long history of opposing Trump, dating back to Trump’s 2016 campaign. Soros backed various efforts, including court challenges, protests, and advocacy to limit Trump's influence during his first term. Soros and his network have played an active role in shaping U.S. domestic politics, funding campaigns for progressive candidates, and supporting policy initiatives like Biden’s infrastructure bill. In short, he has played enough Political Influence in Domestic Policies which were not in favour of Mr. Trump.

 He has played significant political Backlash against Trump. Soros’ involvement in U.S. politics has made him a target of Trump’s supporters, who have labelled him as a "domestic terrorist" and sought to undermine his influence.

When Joe Biden won in 2020, a Soros-linked think tank lobbied his administration to support policies favouring OSF principles in nearly two dozen different policy areas and laid out $20 million to create “grassroots organizations” to sell Biden’s $1.2 trillion infrastructure bill.

Market signals and warnings from figures like Stan Druckenmiller suggest that financial and political insiders are anticipating a Trump victory, potentially undermining Soros' political goals.

In summary, Trump's return to office, is a major blow to Soros' political investments and efforts, as the billionaire has placed considerable resources into opposing Trump and supporting Democratic causes. His strategy may need re-evaluation in the face of Trump's potential resurgence.

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Japan Triggers the Fall for the Market- The Economic Truth of Capitalisim

 

 

The strengthening of the Japanese yen has triggered selling pressure from investors who had previously engaged in "carry trades." In such trades, investors borrow in a low-interest currency like the yen and invest in assets denominated in higher-yielding currencies, such as the U.S. dollar. Well this cannot go on for unlimited time decade after decade. When the yen appreciates, the cost of repaying these yen-denominated debts increases, prompting investors to sell off assets, including U.S. equities, to cover their positions.

The negative reaction of U.S. equities to the yen's rally is a sign of how interconnected U.S. equity valuations are with the global monetary system. As the yen strengthens, investors' need to unwind carry trades could put additional downward pressure on U.S. equities. The combination of carry trade unwinding and Japanese financial institutions repatriating capital could lead to significant selling pressure on U.S. equities, exacerbating market declines. As Japan potentially moves toward financial repression and a focus on domestic assets, this shift could lead to a prolonged period of capital repatriation.

The recent drastic shifts in the global stock markets, marked by significant declines in major indices like the Nasdaq 100 and Japan's Topix, have led to widespread panic among investors. The VIX index, Wall Street's "fear gauge," has spiked, reflecting heightened market volatility. Here's a breakdown of the factors contributing to this turmoil:

Key Factors Behind the Market Turmoil

1. Diminishing AI Euphoria:
• The rapid decline in tech stocks, particularly in the semiconductor sector, has been a significant driver of market fear. Companies like Nvidia and Intel have seen sharp fluctuations, reflecting investors' reassessment of the high expectations placed on artificial intelligence (AI) and chipmaking.
• The downturn was exacerbated by disappointing earnings from major tech firms, including Alphabet, Amazon, Apple, Meta, and Microsoft. Despite some positive revenue reports, the overall sentiment has soured, leading to a sharp sell-off in tech shares.
2. Geopolitical Concerns:
• Comments from former U.S. President Donald Trump regarding Taiwan's defense responsibilities and the Biden administration's plans for new restrictions on chipmaking equipment exports to China have added to the uncertainty. The potential geopolitical risks, particularly concerning Taiwan's strategic importance in the semiconductor supply chain, have further weighed on investor sentiment.
3. Shifting Economic Expectations:
• The recent U.S. jobs report showed a higher unemployment rate and fewer jobs added than expected, raising fears of an impending recession. This shift from the previous "bad news is good news" mentality, where weak economic data was seen as a sign for potential interest rate cuts, has now flipped to "bad news is bad news," with concerns about economic slowdown outweighing the potential benefits of lower borrowing costs.
• The Federal Reserve's potential rate cuts have not provided the expected market boost, as investors are more concerned about the implications of slowing growth on company earnings.
4. Strengthening Japanese Yen:
• The Japanese yen has strengthened significantly, partly due to the Bank of Japan's unexpected decision to raise interest rates. This appreciation has negatively impacted Japanese stocks, particularly those of companies with significant overseas earnings.
• The unwinding of yen carry trades, where investors borrowed cheaply in yen to invest in higher-yielding assets, has led to additional market instability as these positions are closed.

Market Reactions and Investor Concerns

Investors have sought traditional safe havens like gold, the Japanese yen, and U.S. Treasuries amidst the turmoil. However, even these assets have shown signs of strain, with gold prices experiencing a sharp drop, possibly due to forced selling to meet margin calls elsewhere. This suggests a risk of a broader market sell-off, further exacerbating the situation.

Looking Ahead

The immediate future of the markets remains uncertain, with two critical questions looming:

1. Asset Exposure: Whether the sharp price swings have significantly impacted heavily exposed entities, potentially leading to broader financial instability.
2. Market Sentiment: The collective investor mood will be crucial in determining whether the market will stabilize or continue its downward trajectory.

Conclusion Analysis 

Given the recent volatility and the range of contributing factors, caution is warranted. The potential for further declines and increased volatility remains high as markets adjust to changing economic, geopolitical, and financial conditions. Investors are advised to monitor these developments closely and consider the implications for their portfolios. The recent rally in the Japanese yen, appreciating by 2.7% against the U.S. dollar since the start of the week, signals a significant shift in market expectations and monetary policy dynamics. This movement has prompted money markets to anticipate that Japan's overnight call rate could reach 0.4% by the end of the year, indicating a tightening stance by the Bank of Japan (BoJ).

The diverging monetary policy trajectories between the BoJ and the Fed have several key implications:

• Currency Movements:
• The contrasting stances are likely to lead to further appreciation of the yen against the dollar. A stronger yen could have various effects, including making Japanese exports more expensive and potentially dampening economic growth in Japan.
• The yen's appreciation might also exacerbate the challenges for Japanese investors engaged in carry trades, as mentioned earlier, and could lead to more significant capital flows back to Japan.
• Global Financial Markets:
• The differing policy approaches could create volatility in global financial markets, as investors adjust their portfolios in response to the changing interest rate landscape. This volatility could affect equity markets, bond yields, and foreign exchange rates.
• Investment Strategies:
• Investors may need to reconsider their investment strategies in light of these shifts. For instance, the expected tightening by the BoJ might make Japanese assets relatively more attractive, while the Fed's easing could support U.S. equities and bonds.

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U.S layoffs Speaks Loudly 50 to 75 bps rate Cut

 

The U.S. market has been in a slowdown phase for a longer time but it was hiding. The corporate has been struggling and the same is evident from the number of layoffs in CY-2024. Numerous companies have announced layoffs in 2024, including significant cuts at firms like Tesla, Amazon, and Microsoft, among others. These layoffs span various industries and highlight broader economic challenges.

 When people stop consuming McDonald's and shift to some other foodstuff then it's well clear that the U.S inflation is choking the households, furthermore, customer traffic at US fast-food restaurants fell 2% in the first half of the year compared to the same period a year ago, according to Circana.

Looking at the number of companies cutting down jobs in 2024 its expected that in September 2024 we will witness a 0.5 to 0.75 rate cut from the U.S.

Overall, the report highlights a challenging economic environment characterized by weaker job growth, rising unemployment, persistent inflation, and significant market volatility. The anticipation of interest rate cuts and widespread layoffs further underscores the concerns about a potential economic slowdown or recession.

 The U.S. July Jobs Report presents a concerning picture of the economy. Here's a summary of the key points:

Job Growth: The economy added only 114,000 jobs in July, the lowest since January 2021, following a significant downward revision for June from 206,000 to 179,000 jobs. This marks a downward revision of 27,000 jobs.

Unemployment Rate: The U.S. unemployment rate rose from 4.1% to 4.3%, reaching the highest level since October 2021.

Inflation Concerns: The 3-month annualized core Producer Price Index (PPI) inflation rose to 5.0% in June, the highest since 2022, and more than doubled in six months. Core PPI inflation increased to 3.0% in June and has risen in four out of the last five months, signalling that inflation is still elevated.

Mortgage Rates: The average rate on a 30-year mortgage fell 22 basis points to 6.40%, the lowest since April 2023. The recent high was 7.52% in late April 2024. The average interest rate on personal loans is 12.36 per cent, as of July 24. In 2021, the average rate was just 9.38 per cent, when the fed funds rate was near zero.

Market Reaction and Rate Cut Expectations: Prediction markets are now anticipating four interest rate cuts in 2024, with a 50 basis point to 75 basis points cut expected at the September meeting. There's even a 31% chance of five or more rate cuts in 2024, suggesting growing concerns about an economic recession.

Stock Market Performance: The S&P 500 has lost $3 trillion in market capitalization since July 16th, indicating significant market turmoil. The Nasdaq 100 index has entered correction territory, down over 10% from its all-time high.

 Revisions in Job Reports: Revisions have consistently lowered job growth figures, with 5 out of the last 6 and 10 out of the last 14 jobs reports being revised downward, reflecting weaker-than-expected employment growth.

 Federal Reserve Actions: The Fed's balance sheet has decreased by $1.71 trillion since April 2022 but remains $3.1 trillion higher than pre-COVID levels. The pace of balance sheet reduction slowed from $95 billion to $60 billion per month in June. The govt is on pace for spending $1.5 trillion for interest payments on the debt during the next 12 months.

The govt collects about $5 trillion in revenue annually, so that means 30% of all revenue is going to interest payments. By late 2026 we will have $40 trillion in debt. If rates stay at 5% that will be about $2 trillion per year in interest payments. Our debt is out of control and swallowing the govt budget.

Market Dominance and Volatility: The U.S. stock market remains dominant, accounting for nearly 50% of global market capitalization. Historical data shows that the Volatility Index (VIX) typically rises during election years, leading to market corrections.

 Conclusion:

The weaker-than-expected job growth and rising unemployment rate highlight potential challenges for the U.S. economy. Inflationary pressures remain concerning despite a decline in CPI inflation, as core PPI continues to rise. The expectation of multiple rate cuts indicates market anticipation of economic slowdown or recession. The stock market's recent performance suggests investor caution and potential volatility ahead.

The rate cut is now expected to be 0.75 but there is nothing to bet now since the Fed will not take action based don one-month data. Hence more data is required to firm up the rate cut for next month. Further, if the rate cuts are being delayed further then equity markets will react negatively since the current optimism for rate cuts is so high that every bad economic news is being discounted. This discounting might take a reverse hit. The biggest advantage of the rate cut would be that funds will flow to India and emerging markets as we have seen historically.

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From Rs21 to Rs 100 NAV ( In 4 years) Journey & Celebration of Motilal Oswal Midcap Fund -

The Motilal Oswal Midcap Fund-Regular has shown strong performance across various time horizons, particularly in the medium to long term. Despite short-term volatility, the fund's substantial returns over 3 months, 6 months, 1 year, and beyond indicate effective management and favourable market conditions for mid-cap stocks. Investors seeking exposure to the mid-cap segment may find this fund to be a valuable addition to their portfolio, given its demonstrated potential for significant growth and resilience over time.

If we do the analysis of the returns, we find stellar analytics.

Medium-Term Performance

3 to 6 Months Performance: The fund has demonstrated strong medium-term performance with returns of 19.21% over 3 months and 30.45% over 6 months. This significant growth reflects the fund's ability to capitalize on market opportunities and effective stock selection within the mid-cap segment.

 

9 Months Performance: The return of 53.29% over 9 months underscores the fund's robust performance in the medium term, suggesting effective fund management and favourable market conditions for mid-cap stocks during this period.

Long-Term Performance

1 Year Performance: With an impressive return of 63.02%, the fund has significantly outperformed in the long term, indicating strong growth and resilience in its portfolio.

 

3 Years Performance: The fund's annualized return of 37.66% over 3 years showcases its consistent performance and effective strategy in managing mid-cap investments.

 

5 Years Performance: The 32.60% return over 5 years further emphasizes the fund's long-term growth potential and successful track record in the mid-cap category.

 

Since Inception: The fund has delivered a cumulative return of 24.33% since inception, highlighting its overall success and growth trajectory over time.

What we are missing is that we need to find out what made the fund to achieve a stellar return? From where did the funds returns came up? It’s the sector allocation and right allocation and exposure skill of the Fund Manager in picking up the allocation.  The identification of timing by the Fund Manager in terms of Entry and Exit of sector allocation plays a pivotal role behind the fund. Effective sector allocation significantly impacts fund returns by balancing growth potential and risk. Analysing economic cycles, market trends, policies, and consumer behaviours allows fund managers to strategically allocate investments to sectors poised for strong performance, thereby optimizing returns and managing risks.

Sector Allocation Trends from April 2023 to June 2024:

During the period from April 2023 to June 2024, various sectors experienced fluctuations in their allocation percentages within investment portfolios. Here is a detailed summary of the trends for key sectors:

Alcohol

·       Trend: Showed initial growth from April 2023 (1.10%) to June 2023 (3.18%), then fluctuated, ending at 10.65% in June 2024.

·       Peak Allocation: June 2023 with 3.18%.

 Automobile & Ancillaries

·       Trend:  Consistently high allocations with fluctuations, starting at 13.93% in April 2023 and ending at 10.65% in June 2024.

·       Peak Allocation: November 2023 with 16.65%.

Banks

·       Trend: Low and fluctuating allocations, starting to be tracked from July 2023 at 1.50%, with a decline towards early 2024 and slight recovery to 5.07% in June 2024.

·       Peak Allocation: June 2024 with 5.07%.

 Capital Goods

·       Trend: High initial allocation with fluctuations, from 8.59% in April 2023 to a low of 1.38% in May 2024, recovering to 5.07% in June 2024.

·       Peak Allocation: July 2023 with 9.24%.

Chemicals

·       Trend: Stable high allocations, starting at 10.03% in April 2023, dipping slightly and ending at 4.65% in June 2024.

·       Peak Allocation: November 2023 with 9.19%.

 Construction Materials

·       Trend: Steady but low allocations, starting at 1.11% in April 2023 and remaining below 1% from June 2023 onwards.

·       Peak Allocation: April 2023 with 1.11%.

Consumer Durables

·       Trend: Generally stable, starting at 3.39% in April 2023 and increasing towards the end, with 5.39% in June 2024.

·       Peak Allocation: December 2023 with 5.74%.

Diamond & Jewellery

·       Trend: Allocations tracked from December 2023, starting at 9.59% and decreasing to 7.64% in June 2024.

·       Peak Allocation: December 2023 with 9.59%.

Electricals

·       Trend: Initially low and erratic, from 0.33% in June 2023 to a peak of 4.80% in June 2024.

·       Peak Allocation: June 2024 with 4.80%.

Finance

·   Trend: Consistent increase from 8.28% in April 2023 to a peak of 18.46% in October 2023, then stabilizing around 10.48% in June 2024.

·       Peak Allocation: October 2023 with 18.46%.

 

FMCG

·       Trend: Steady but low allocations, starting at 3.98% in April 2023 and remaining below 4% throughout the period.

·       Peak Allocation: May 2023 with 3.28%.

 Healthcare

·       Trend: Decreasing trend from 5.20% in April 2023 to 1.28% in August 2023, then fluctuating and recovering to 5.26% in June 2024.

·       Peak Allocation: April 2023 with 5.20%.

Hospitality

·       Trend: Data for this sector is only available for April 2023 with 4.20%.

·       Peak Allocation: April 2023 with 4.20%.

 Infrastructure

·       Trend: Data for this sector starts from March 2024 with an allocation of 2.39%.

·       Peak Allocation: March 2024 with 2.39%.

Iron & Steel

·       Trend: Fluctuating allocations, starting at 1.93% in April 2023, peaking at 4.84% in August 2023, and declining to 0.91% in January 2024.

·       Peak Allocation: August 2023 with 4.84%.

 

 IT

·       Trend: High and stable allocations, starting at 16.48% in April 2023 and slightly fluctuating to end at 17.98% in June 2024.

·       Peak Allocation: October 2023 with 24.14%.

 

 Media & Entertainment

·       Trend: Data starts from November 2023 with low allocations, peaking at 1.86% in February 2024 and declining to 0.65% in May 2024.

·       Peak Allocation: February 2024 with 1.86%.

 

Plastic Products

·       Trend: Initial high allocations, starting at 1.26% in April 2023, peaking at 2.02% in May 2023, and gradually declining to 0.50% in November 2023.

·       Peak Allocation: May 2023 with 2.02%.

Power

·       Trend: Data starts from April 2024 with an allocation of 3.76%.

·       Peak Allocation: April 2024 with 3.76%.

Realty

·       Trend: Fluctuating allocations, starting at 4.30% in April 2023, peaking at 8.66% in January 2024, and decreasing to 4.79% in June 2024.

·       Peak Allocation: January 2024 with 8.66%.

 

Retailing

·       Trend: High allocations with fluctuations, starting at 4.51% in April 2023, peaking at 9.31% in July 2023, and stabilizing around 7.15% in June 2024.

·       Peak Allocation: July 2023 with 9.31%.

 

Telecom

·       Trend: Low allocations, tracked from July 2023 with 1.71%, peaking at 12.34% in April 2024 and ending at 10.98% in June 2024.

·       Peak Allocation: April 2024 with 12.34%.

 

Textile

·       Trend: Stable but low allocations, starting at 2.37% in April 2023 and gradually declining to 0.25% in January 2024.

·       Peak Allocation: May 2023 with 2.55%.

Key Ratio Analysis with Respect to the Fund

. Standard Deviation: 13.13%

Standard deviation measures the fund's volatility or risk. A higher standard deviation indicates greater variability in returns, suggesting the fund experiences larger swings in its NAV. At 13.13%, this indicates that the Motilal Oswal Midcap Fund has moderate volatility, which is expected for a mid-cap equity fund. Investors in this fund should be prepared for fluctuations in their investment value.

2. Semi-Standard Deviation: 3.79%

Semi-standard deviation measures the downside volatility, focusing only on the instances where the returns are below a certain threshold, typically the mean return. A lower semi-standard deviation compared to standard deviation indicates that the fund's downside risk is relatively contained. At 3.79%, this metric shows that the fund has managed to limit its losses, suggesting effective risk management.

3. Correlation with Benchmark: 0.82

Correlation measures the degree to which the fund's returns move in relation to the benchmark (Nifty Midcap 150 - TRI). A correlation of 0.82 indicates a strong positive relationship, meaning the fund's performance is closely aligned with the benchmark's movements. While this implies that the fund generally moves in the same direction as the benchmark, it also suggests that it offers limited diversification benefits from the broader mid-cap market.

4. Beta: 0.83

Beta measures the fund's sensitivity to market movements. A beta of 0.83 suggests that the fund is less volatile than the benchmark. Specifically, for every 1% move in the benchmark, the fund's NAV is expected to move by 0.83%. This lower beta indicates that the fund might experience smaller fluctuations compared to the benchmark, making it relatively less risky.

5. Treynor Ratio: 4.84

The Treynor ratio measures the excess return earned per unit of market risk (beta). A higher Treynor ratio indicates better risk-adjusted returns. At 4.84, this ratio suggests that the fund has delivered strong returns relative to its market risk, indicating effective management and potential for higher returns relative to its volatility.

6. Sharpe Ratio: 1.07

The Sharpe ratio measures the excess return per unit of total risk (standard deviation). A Sharpe ratio above 1 indicates good risk-adjusted returns. With a Sharpe ratio of 1.07

 

Performance Comparison: The Motilal Oswal Midcap Fund has outperformed its benchmark, Nifty Midcap 150 - TRI, across all timeframes provided. Notably, its 1-year return of 69.30% significantly surpasses the benchmark's 55.38%.

Risk and Return: The fund exhibits a strong Sharpe ratio of 1.07, indicating good risk-adjusted returns. The beta value of 0.83 suggests lower volatility compared to the benchmark, while the tracking error of 2.27% indicates moderate deviation from the benchmark.

Capture Ratios: The Up Capture Ratio of 104.48% shows that the fund has captured more gains than the benchmark during market upswings. The exceptionally low Down Capture Ratio of 11.58% demonstrates strong downside protection.

Conclusion

The Motilal Oswal Midcap Fund-Reg(G) has demonstrated impressive returns and favorable risk metrics, making it an attractive option for investors seeking exposure to mid-cap equities. However, potential investors should consider their risk tolerance and investment horizon, as mid-cap funds can be more volatile compared to large-cap funds. The fund's strong performance and risk management suggest it may be a suitable addition to a diversified portfolio, particularly for those seeking growth opportunities in India's mid-cap segment.

Overall, the sector allocations show significant variability over the months. Notably, IT, Finance, and Automobile & Ancillaries sectors maintained high allocations, indicating a strong investor preference. Meanwhile, sectors like Construction Materials and Media & Entertainment had relatively low and inconsistent allocations. The data reflects dynamic shifts in investment strategies, likely influenced by market conditions and sector-specific performance.

Well this is just an analysis of the Past allocation and hence not an investment advise. This is for information purpose. We will be coming up with such analysis of other funds too.

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