Midcap and Small Cap valuation metrics are Wrong Compared to Past patterns.

 

As soon as the NIFTY breaches the 20000 mark what triggered all investors to book profit and exit from quality stocks. Well, valuations are the name on which the oat of redemption was taken. But the question is, "Is the valuation measurement based on the old economic story of India or the new one which we know but still don’t know”? Is the current Midcap correction related to some economic problem or its technical-driven fall? Are the macro factors of mid and small-cap segments having risk of economic growth? 

In continuation to the previous article, it is found that every investor is now in dilemma about the investment options to be adopted keeping volatile or falling midcaps and small caps.  The Nifty MidCap 100 Index has risen by 29% so far this year, compared with an 11% gain in the Nifty Index.  A mere 30% raise spooked redemption alarms in our minds and we love to discuss long-term wealth creation. What an Irony? In the last year as well, the Nifty Midcap and Nifty Smallcap indices have rallied nearly 24% each, compared to a 10.64% jump in Nifty50.

Well, when we look at the index returns from April 2023 to 11^th September we find Nifty midcap went up by 37% whereas the Nifty small cap went up by 43% and Nifty Microcap 250 went up by 57% approx. Clubbing whole together the segment has made significant returns over the last 2 years despite of Ukraine –Russia war, continuous steep hike of interest rates by the U.S. FED, and high food inflation and commodity inflation before coming down in 2023.

 Do you know that as an investor your skeptical behavior will lead to a significant drop in your wealth and many new generation investors in the capital market might beat you in terms of wealth creation in the long term simply by changing the mindset of investments?

Why we cannot trust the rally? Why we do not believe in Indian economic growth? Where we are falling short of reaping the long-term gains of the Market linked with the Economy?     We will get back to this at the end of the research insight but before that, we need to re-evaluate the Indian midcap and small-cap growth linked with the Indian economic growth.

 We need to know who is behind the wheel of midcaps and small growth for the long-term journey of the Indian economy and market. The Indian midcaps and small caps have a significant opportunity for growth riding on domestic and global disruption of the supply chain.

According to data from the two depositories, CDSL and NSDL, this is the highest since January 2022 and about 50 percent more than the previous 12-month average of 2 million. The total number of demat accounts now stands at a new high of 123.50 million, according to data. This number is unstoppable since the gen next knows about investing and its compounding value very well. As of August 2023, year-on-year demat account openings increased by 25.8%.

The Mutual Fund Industry is equivalently attracting inflows into Midcaps and small caps and one will find this inflow for the long term for every correction in the segment. Mid-cap mutual fund inflows surged from 9.9 percent to 19.2 percent, while small-cap fund flows skyrocketed from 6.2 percent to a remarkable 41.9 percent in FY24

 Midcaps Opportunity Linked with the Long-term Indian Economic Transformation.

·       There is a significant transformation happening in Indian manufacturing due to supply chain disruption.
·       In the last 5 to 10 years there has been a significant change in India's infrastructure - the total length of national highways in India has increased from 91,287km at the end of FY14 to 145,155km at the end of FY23 ended 31 March.
·       On the other hand meanwhile, central government capital expenditure has risen from Rs2.6tn or 1.5% of GDP in FY18 to Rs7.4tn or 2.7% of GDP in FY23 and is budgeted to increase to Rs10tn or 3.3% of GDP this fiscal year.
·       Physical infrastructure is improving connectivity and lowering logistics costs for industries which improve the supply chain for India.
·       The annualized capacity utilization is trending higher at 74.3% in March, near a 10-year high
·       As per the data of RBI the total number and total costs of projects approved by banks/financial institutions, were up 36% and 87% YoY respectively in FY23 to 547 projects worth Rs2.7tn. Significant opportunities for ancillary industries and most of them are in midcaps and small caps.
·       We have  two hand opportunities of manufacturing growth where one is backed by domestic consumption growth and the other is that India  becomes global supply chain hub post China +1
·       At the same time annualised new private project announcements rose by 70% YoY to a record Rs28tn in the four quarters ended 30 June.
·       Gross capital formation which reflects the investments and its outlook for Indian companies it is being found that the GCF to GDP ratio has risen from a cyclical low in FY21 to a 15-quarter high of 29.2% in 1QFY24 ended 30 June
·       Till now the Indian economy has witnessed that the manufacturing share of GDP has only risen to about 18% from 15% over the past two decades. By contrast, service industry share has leapt to 55% from 45%. Hence manufacturing has more opportunity for growth which leads to significantly higher growth in the service industry.
·       We all know the GIG economy opportunities supporting the consumption of India and further growth of the same would bring more economic power for India. This GIG economy is the consumer market.
·       There were more than 90,000 startups in 2022 in India versus less than 1,000 in 2016. We now have over 100 unicorns. In the coming days, we will find more startups in manufacturing and
·       It has been found in market research data by a third-party organization that the Indian consumer market will more than double by 2031, surging to $5.2 trillion from $2.3 trillion in 2022.
·       Consumer spending on food will rise to $1.4 trillion by 2031 from $615 billion in 2022. Spending on financial services is also expected to  climb to $670 billion from $280 billion
·       If we look at the demographic opportunity we find that India is home to more than 600 million people aged between 18 and 35, with 65% under the age of 35.
·       This is the consumer market driving consumption for goods and services that they have never used in the last 15 to 20 years in India.
·       Now skill development opportunities are going to get the growth for the Indian economy as manufacturing will now have a significant share in the next 10 years in India.
·       If we look at the number we will find that the lower skill level in Indian manufacturing means that each employee added just $8,076 of value on average in 2021 as compared to countries like the US and Europe. Even if we draw a comparison with Asian countries like Thailand and Malaysia the numbers are $18,308 & $34,402 respectively.
·       The Digital infrastructure is changing the landscape along with the physical infrastructure of India.
·       India has emerged as the fourth-most popular destination for startups in the world in 2022, attracting 4.2% of global venture capital, behind the US (41%), mainland China (18%) and the UK (6%). Hence, India has a huge opportunity with a 1.4 billion population its to find more growth coming from Digital Infrastructure and economy.
·       G20 has been a perfect example reflecting the opportunities that will be enchased by the Indian mid and small caps over the next 5 to 10 years.

 

Why we cannot trust the rally? 

Why we do not believe in Indian economic growth? 

Where we are falling short to reap the long-term gains of the Market linked with the Economy?    

 The opportunity that an investor is being measured is often faces paralysis with short-term quick gains and corrections following the next.

 The word long term is also misused and hence the word fails to create patience within investors hence long-term wealth creation is limited to few investors only.  Long-term for us means 5 to 8 years of Indian economy. Despite volatility and short-term corrections, a long-term wealth creation opportunity is high since the same is married to Indian macro factors.  

 Those who are thinking that the markets will fall and Midcaps and Smalls caps will face a historical story of falling like a pack of cards are sorry to disappoint that’s not going to happen anyway.  The reason is that you will find more new buyers having a significant long-term vision of investing and getting into the market to invest. As we said earlier the mindset of investing in the market will play a role in wealth creation in India. Many investors did not make much money despite the above rally of the indexes but at the same time, many new breeds of investors built strong confidence from investing during those times. Don't change your risk profile but at the same time don't be so skeptical about investing in midcaps and small. Markets will fall, and individual stocks will fall but the quality ones in mid and small space will jump back again since through their active participation in the economy the GDP will not grow by 7% or 8%.

Those who are comparing that from 2017 to 2020 Mid & small caps did not perform well if you remember that in 2018 we had the I&LFs crisis followed by DHFL and PMC banks sucking out liquidity followed by covid in 2020 and 2021. Now do we have such situations currently in the market that tell us that our valuations are overstretched?  Where we are lacking is that we are taking measurements of valuations based on old metrics and not on the new Indian economy riding on physical and digital infrastructure.

 

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BUBBLE OR BULL MARKET....ELECTION & MARKET

 Are we in a bubble or is it real growth for the stock market? This one of the biggest questions in the minds of the investors and every player in the market is this bubble for the NIFTY & Sensex. We are in a Bull market of course, but have not reached a Bubble phase yet.  The Nifty has scaled up from 17,277.65 as of 31st March 2023 to 19800 levels as of 8th September 2023 and this has raised our eyebrows when the global economy is facing headwinds, particularly in China and the U.S.  More importantly, the current rally of the market might continue since this time election is very much linked with the stock market behavior hence more focus on higher levels.

 Nifty is up by ~12% FY24 YTD and ~7% CY23 YTD – this does not clearly look like a ferocious bull market return by any measure. By the same measure, the Midcap 100 index has rallied by ~26% FY24 YTD and ~20% CY23 YTD. Hence, it is well clear that markets are not in a bubble but in the bull market phase.

 Let’s get quickly into some numbers where we get an idea about the macroeconomic strength and its impact on the Indian stock market which is getting reflected now we find that:

• Manufacturing Capacity Utilization at 76.3% in Q4FY23
• NSE-500 Debt to Equity falls from 1.4x in FY18 to 1.1x in FY23
• Banking sector NNPA declines from 5.9% in FY 18 to 1% in FY 23
•  Capex expectations on NSE 500 much higher in core sectors vs. FY 18 (Oil & gas, Metals, Power, Auto, Telecom, Cement): Ref next slide
• Non-food credit growth at a robust ~20% YoY in Jul-23
• New project announcements in the manufacturing sector increased by 1.6x in 4 years.

Capex Cycle of India

If we look at the capex cycle we find that the state’s government’s quality of spending has improved as seen through higher state capital spending vis-à-vis revenue expenditure. Current Capex is at Rs2.79tn in Q1FY24, posting a 59% YoY FYTD growth. The monthly run rate of Rs928bn so far exceeds the run rate of the last four years. Further in FY 24, the present central government has adopted two more measures to support state spending.

In the context of the global map, we find that India’s real GDP growth projections for both FY24 and FY25 are double the global growth projections (3% for both years). They are also higher than all AEs, EMs, and Developing Economies (July 2023, IMF). The ratings of India have been revised upside down by many global rating agencies and brokerage houses.

If we look at the inflation we find that climate-related issues have created immense pressure on household budgets rising from food inflation. Further, as crude prices have elevated back to $90 the commodity prices might go up but thanks to the Chinese economic slowdown it will not create a major havoc for inflation. The fiscal condition of India is much stabilized as compared to the previous couple of years. The GST, indirect and direct tax collection, and import/export all are in a much better position keeping a strong check on the fiscal imbalances.

Role of Election in the Market

We are just a few months away from the Indian election of 2024 which is going to be an immense event not for India but for the global economy.  The Indian stock market plays a pivotal role in the election and this time the impact of the new segment of investors who are joining the market will be the key decision-makers. Today there are about 100mn+ stock market investors which are about four times larger than five years ago. Further, there are over 500 mn+ + social media users and first-time voters of about 130mn. The stock market and higher levels of the stock market will keep and play a major role in the election.

Flows into the Market

The size of inflow into the equity market has grown significantly from DII’s:

• PMS saw AUMs rise at 12% CAGR over 10-yrs, and now at 27% of MF
• SIP collections in ~7yrs is USD 100bn a CAGR of 45%
•  SIP inflows translate to 2x Net Equity MF inflows (average of last 12 months, & in July 23)
• Nifty-50 Consolidated  EPS for FY24 & FY25 stand at Rs 990 & Rs 1128, with growth at ~20% & ~14%, translating to PE at 19.7x & 17.3x 
• The below data of cash holding is for 10 AMc out of 44 AMC hence the cumulative number of the rest will be more in terms of cash holding.

Midcaps Time Yet to Come

The Midcap 100 index has rallied by ~26% FY24 YTD and ~20% CY23 YTD. The earnings of this segment are about to grow significantly and we are getting ready to see new earnings upcycle for mid/small caps. The prime reason backing the new upcycle in earning demand is from rural India bottoming out, decline in input costs, elevated rates but a status quo, and India benefits from the shifts in supply chains. Further, as the election comes near we will find many government sops and incentives and price reduction policies creating more liquidity for consumption. Any tweak in GST in specific sectors will bring more growth for the economy and market. On the other hand, what keeps the Indian markets on their toes is the gradual rise in global crude – up by ~25% between Jul - Aug. The implied price for India’s crude basket for Aug’23 is around USD 86-87 per bbl. But we have many sources of supply hence the price escalation may not be worrisome keeping the election in mind since the govt may absorb much of it in case of higher prices

Election is what makes us skeptical.

The upside of the market looks capped as the current valuations discount the optimistic projections. More importantly, we have 5 state elections before the Lok Sabha Elections between late 2023 to early 2024- Mizoram, Telangana, Rajasthan, Madhya Pradesh, and Chattishgarh. Furthermore, Uttar Pradesh and Maharashtra are likely to be crucial to the election outcome as these two states are the largest contributors to the Lower House, with 128 seats and nearly a quarter of the chamber's 543 elected representatives. Since 1984, there have been two instances (out of 10) when the market was down on an absolute and relative basis six months and three months before the election (1998 and 2009). Further the new alliances I.N.D.I.A is going to give challenge and fight to the current government and this is where we are skeptical.

 Investors Role:

Follow your asset allocation and risk profiling. Re-check your goals and risk levels so that you get a clear idea about investments. Rebalancing of portfolio and where the investor is skeptical for risk-taking ones should get into defensive sectors to avoid any nightmare.  Passive investing –investing in the Index should be done through the STP route. Investments should be linked with goals and not out of emotions derived from the short-term rally of markets. Invest in a staggered way and use liquid and STP routes to invest in MF, PMS, or AIF (where a staggered payment option is available). Adopt advisor services where required since every subject needs a specialist to guide despite having free guidebooks available in the market. Your investment should be linked with a vision for 2030 of India. We are not in a bubble we are in a bull phase backed by strong macro support and a domestic investor-driven market. You will enter points either through a price correction as well as through a time correction for investing. The current business cycle is still in the negative zone with depressed earnings making valuations optically expensive but it is not a bubble since the hard part of interest rates and higher commodity prices just like CY-2022 is over.

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Commercial Real Estate ... Dead Lock for Private Equity Funds

 The aggressive rate hike consequences have been witnessed but we are yet to witness a major setback across the globe where MSMEs and start-ups will bleed further. In this story, we are digging behind the rationales which germinate the crisis in the coming days.

  Mortgage Applications to buy a House just dropped 39% YoY in March. That was the worst March performance since 1995. The slowdown in the US economy is now becoming very prominent. Prices and rates are still too high. Buyers can't afford it. Check out Austin, TX for instance. Monthly House Payment for a new buyer of $3,600 compared to $1,800 two years ago.  Well, you may not face 2008 but are you ready to face any slightest of the same is the biggest question of today?

The private equity space is becoming more of a pain due to the rising interest rates and asset-class investments they have made over the last couple of years.

143 US companies filed for bankruptcy protection in the first 75 days of the year, including 16 companies with private equity or venture capital backing, according to an S&P Global Market Intelligence analysis.

If we look at history we find that the housing industry's collapse was mainly due to continuous increases in interest rates when buyers left the market. Rest of the history we know. This time buyers are again leaving the industry simultaneously the workers are losing jobs and becoming unemployed. Commercial real estate projects have been a nightmare due to rising interest rates making it difficult to fund conversion projects.

Many city projects are awaiting for major fall back likewise Vancouver’s where the vacancy rate is at 9.8 percent in the fourth quarter of last year – slightly below the 2017 vacancy-rate peak of about 10 percent, which at the time was a 12-year high. Manhattan’s overall vacancy Close to 19% of all high-end office space available for lease in the fourth quarter of 2022, according to brokerage Savills, up from 11.5% in early 2019.  On the other hand San Francisco’s office vacancy rate shot up to a record high of 29.4% in the first quarter, nearly eight times the pre-pandemic level.

 The value of the property is falling at the same time the investment market is plummeting when the asset class is compared to rising yields on bonds and other securities. The risk is growing bigger every day for the commercial real estate sector. It has been found that office defaults increase as more mortgages that were signed before the pandemic expire. Around $2.6 trillion in commercial mortgages are set to mature between 2023 and 2027.

Now we need to know the depth of the mortgage the bank holds and the depositor’s money parked with the bank. During the pandemic, the stimulus package of the US resulted in an accumulation of $2.3 trillion in so-called excess savings which were parked with banks as that was the best product to earn yields. Now banks further deployed deposits and invested in mortgage-backed securities valued at $2.8 trillion at the end of 2022, or about 53% of securitized investments. Well, now one can measure the depth of risk of housing collapse for the US. 

Thanks to the accounting rule unless the bank sells the asset there is no loss in the books. But the unrealized losses on banks’ mortgage-backed securities were $368 billion at the end of 2022, according to FDIC data analyzed by the Journal. On the other hand, Banks held $444 billion of commercial mortgage real estate securities at the end of 2022.

Any redemption pressure from the bank end will trigger reverse pressure on these asset classes and papers.

The private equity trigger will massively create a significant vacuum of liquidity in the coming days for the global economy. We might find significant pressure on the PE-backed start-ups and M&A might rise due to a liquidity crunch.  It has been found that PE buys risky assets like real estate and mortgage papers. Private-equity firms have raised record amounts of cash in recent years and announced nearly $730 billion in investments, according to Ernst & Young LLP. Reprising of real estate will lead to massive falls in all corners of the economy. This reprising will hit books which will be another contagion impact.

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CONTRA INVESTMENT TO MAKE WEALTH FOR INDIAN INVESTORS IN 2023

 

 The biggest question in mind is how the Global Markets and Indian Markets will behave in the coming 6 months and what should be the investment strategy.  The global economy faces the biggest risk of sanctions which will be coming in 2023 due to the ongoing war between Russia and Ukraine. The war-based sanctions will play a key role in the economic uncertainties, global inflation, and most importantly the interest rate climate.

The recent market correction is due to the expectation of interest rates to come down from the 4^th quarter of the calendar year 2023. This is the very reason why S&P 500 went up until now from Jan 2023.

In 2010 when the US economy was printing money and was deploying the same job numbers, inflation, wage hikes, and unemployment both failed to get a boost up from such policy actions. 2023 we are just the mirror image of the same phase where interest rates are climbing up but inflation is not coming down, neither unemployment numbers are increasing nor wages are coming down. But the reason behind such things happening is that most of the US inventories are too high hence less working capital is required and hence less impact of the interest rate hikes. Further short-term rate hikes do not mean a change of plan for the long term since everyone in the US and across the globe knows that this rate of interest in not sustainable for the largest economy on the earth. Industrial inflation will be more governed through sanctions-based disruption in the supply chain.     On the other hand, china and the EU will drive the demand for global goods and services.  

On the other hand job numbers is not very clear to showcase the real economic impact due to the interest rates. High-paying jobs are getting replaced with low-paying jobs. The latest number for the month of Jan 2023 reflects that mostly the Hospital sector. 2/3 rd of the US are living paycheck to paycheck and around 40% struggling to pay bills. The household debt of the 4^th quarter of 2022 has gone by $ 394 billion adding to the $1.69 trillion. Credit cards went up $61 billion whereas mortgage balances are $11.92 billion which is a trillion-dollar increase for 2022. The younger generation is feeling the heat of interest rates. This number is only going to increase for limited quarters of the Calendar year 2023.

At the same time interest rate hike is going to again re-adjust the earnings outlook for the coming quarters. This will get reflected and absorbed by the market in the coming months which will get reflected in the stock price too.

India

Indian economy is already being warned of El Nino which will impact the agricultural sector and so as agri-based consumption and festive season consumption. In the past 22 years, there have been three instances — 2002, 2009, and 2015 — where rainfall deficit coincided with an El Nino event, leading to severe droughts in India.  The slowdown in consumption will impact sectors like auto, FMCG, and all those which are linked with agricultural income base consumption. We are witnessing a cut down in auto and FMCG already and the same will spill over in the coming months.  Tractors that play a pivotal role in agri sector will also witness a drop in sales if the El Nino impact leads to low rainfall and prolonged summer. Food inflation will also grow since crops will be damaged and the impact of the same is on household budgets which will further spill over to cut down on consumption in other areas impacting the market, sectors, and stocks.

From here we draw the conclusion that our investment allocation should now be focused on sector-based allocation moving away from the traditional mode of the investment thesis.  The government's aggressive allocation and expenditure towards the infrastructure will be a savior from the expected downfall calculation projected from El Nino. The railway sector allocation in the budget will create limited benefits for the private sector and individual stocks. But we will witness the growth of green shoots from PP projects in infrastructure.  Rising inflation and uncertainty in the job market will impact real estate consumption too. Buyers will mostly postpone buying opportunities. Post April we will see the forward outlook by the various industry leaders which will decide the course of action and strategy for investments and also investments allocation.

Indian Market Micro Numbers

In the last 10 years, it has been found that NSE 500 stocks surged to record highs. One-third of the companies are currently trading at a PE of more than 50 times. About 10% of the stocks in the NSE 500 universe trade at a PE of more than 100 times and 60% trade at a price to book of over 3 times with a median of 4.3 times. Nearly one-third of the companies are currently trading at a PE of more than 50 times. From FY10 to FY19, the EPS of Nifty 50 moved up from ₹257 to ₹460, a compound annual growth rate (CAGR) of 6.68%. From pre-pandemic (FY19) EPS of ₹460 to post-pandemic (FY22) EPS of ₹771, Nifty 50 clocked an impressive CAGR of 18.79%,  which is 3 times the long-term EPS growth of 6.68%.  

Investment Conclusion Strategy Based on Economy and Sector outlook:

Contra investments will be the best theme to create wealth in 2023 among so many uncertain outlook variables. It’s expected that manufacturing and domestic industrial demand will drive the growth and it will also balance the impact. Taking exposure and investment in auto, IT, FMCG, and that entire sector that will get impacted in the current 2023 will create significant wealth. Every investor will not be able to make an investment in 2023 since the year 2023 is also the year for testing how much capable the investors are to understand the hidden opportunities of investment.  Increasing to Large cap Investment allocation will be better in 2023 with marginal allocation in midcaps. The core portfolio should be aligned toward a large cap. The satellite one can have allocation in Large and Midcap and midcap. Avoid small caps even if they offer lucrative opportunities. Liquidity issues in rising interest rate scenarios would impact portfolio allocation in small caps.  The biggest point is that contra opportunities are enough provided clients understand and identify the same.

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WHO WANTS LEVEL PLAYING FOR AIF INDUSTRY IN INDIA ?

 

SEBI has come up with a consultation paper on AIF commission payment where the current form of upfront will be abolished and the same will be in trail format.  The impact of this change will be significantly high on the wealth Industry. A further direct plan will be introduced in AIF so as to make level playing. Well has asked for these direct plans and also who is demanding a level playing field.  The private equity investment segment which has invested significantly behind the wealth firms should raise its voice and should dig deep to change the ideology that rather than compromising on earnings it’s better to focus on the key segment of so-called miss-selling.  Miss-selling cannot be abolished by tweaking revenue-earning structures. We don’t disagree that miss selling did not happen and wealth butchers were not flocking on the street shopping clients mercilessly.   The wealth Industry will find significant setbacks from this new set of laws under Consultation from SEBI. We won’t be surprised if we find a significant  M&A in the wealth industry and a consolidation.

My 1^st question is what this level playing field means. Does this means that make it a similar product to a mutual fund?  The industry size of AIF Category 3 is just only around Rs.80000 cr hence it has a long way to go ahead to become a significant product in India.  The change of structure from upfront to trail will not only impact the margins of the business but the immediate impact will be on the valuations of these companies, their long-term survival, and most importantly on jobs.  The upcoming valuation of all these listed and unlisted wealth firms will get a significant setback impacting massive layoffs to manage the valuations and profitability.

Why the Regulators or Ministry of finance did not take any actions when HDFC Sanchay-type products were being sold where the commission was still around 45% to 55%.  If the question of level playing needs to come up then it should be across all products and not specific to any one category but here the level playing is with the Mutual Fund product.

The AIF industry itself belongs to HNI and Ultra HNI clients hence their risk-taking ability and investment are completely different compared to a retail client segment.  This segment of clients understands the underline risk and the concept of the AIF investment. Yes, it is agreed that in most cases, senior citizens have been sold this product just based on the commission structure. An age limit can be imposed for such investors so that these senior citizens cannot invest just like we have in insurance.

On one side we raise voices on entrepreneurship and the creation of Jobs and employment and on the other hand, we are killing the growth of an upcoming industry that is at its nascent stage.  Earning plays a pivotal role in every business and it is observed that the finance industry is being demotivated simply by downgrading the earning structures and at the same time bringing down the growth of the industry.

Mutual funds are still miss sold and the same with Insurance.  If we look at the volume of complaints of the various grievance cell of these product-related governing bodies we get much more clarity. When a miss sold case is investigated and found to be valid then how many of these Banks and Financial Institutions have been banned from an operation or levied with huge charges.  Well we only know instances like Karvy and ILF&S but nothing prior to these has been much penalized where a lesson could be given or a factor of fear of wrongdoing imposed.

 When the last time was that the Mutual fund expense ratio was reduced? Well, check the dates you will find that from 2015 to 2018 the battle went and got the expense ratio was reduced so as the earnings and post that within the next 2 to 3 years many AMC got listed. Valuations and listing gains, ESOP encashment at the cost of level playing, and miss-selling.  Now this AIF is facing competition from Mutual Funds hence the factor of level playing comes up significantly. Now post brokerage in AIF being paid in trail AIF will lose its glory and Mutual Funds AUM will grow significantly since the level playing factor will come into play.   Most of Mutual Fund's key Industry leaders don’t have AIF and PMS hence the business faces significant challenges from these AIF manufacturers.  In the coming days, we will find huge churning in Mutual Funds and more inflows into the same.  Don’t be surprised if you find the Mutual Fund Industry to get another million in the next 5 years' time frame.

The size of the AIF industry in other countries will draw your ears. We will take you to the pre-covid numbers of the EU where it is being found AIF market reached USD 10.3 Tn in 2019 in the US (vis-à-vis USD 23.5 Bn in India. AIF investments were valued at USD 7.0 Tn at the beginning of 2019. The market grew 11% from the previous year, mainly following the launch of new AIFs in 2018.

The numbers are enough to speak about the opportunity India could have and will now have post-revision of the structures. Rather than attacking the earnings of the product, the regulator should have focused on the age limit, making limits and restrictions of HNI and Ultra HNI investors and also making different structures for institutional investors to invest in CAT III. Well, the game is played by the same players who played before getting listed to reduce the expense ratio of MF. Post April 2023 many wealth firms and their employees will face hard times if the AIF structure upfront is changed. 

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ALERT ALTERNATIVE INVESTMENT FUND CAT 3

Well, who brings the change in AIF rules and regulations is very clearly hinted at, mentioned, and accentuated in this article. The Indian GDP will grow to 5 lakh cr in the next 5 years but the selling of financial products based on past performance will never end.  If you sell (Alternative Investment Fund) AIF and PMS based on past performance you will qualify for Amsterdam, Span, Hongkong Australia, and Singapore trips offered by B2B platforms.  Don’t be surprised. These are the new tools of miss-selling promoted by many B2B companies.  AIFs are being sold as replicas of Mutual Fund products. Don’t be shocked. The truth is that soon this industry of AIF will meet the fate of mutual funds in terms of the expense ratio and earnings.  We all know how long it took for the MF industry to a reduction in expense ratio and earnings and the path from upfront commission to trail commission model. But in the case of AIF, we may not find or get such a time frame. The changes might come fast and they will shake the industry. Don't forget we have Zerodha who changed the dynamics of the broking industry.

May the ticket size might be hiked from 1cr to 2cr. Manufacturers are not only going to suffer but the creditability and beauty of AIF and PMS will be lost for a long time.  A big question has been chasing in the mind of the distributors soon AIF ticket size might become from the current 1 cr to 2cr or 5 cr and the upfront commission might be brought down to trial mode only.

Very soon the Alternative Industry will meet the destiny of PMS where brokerage will no longer be paid upfront and all will be in the trail. Well, thanks to all those companies who are operating through the B2B model in PMS and AIF industry. We know how financial advisors or so-called mutual fund agents who have grown their AUM with the blessings of the market are selling AIF-like Mutual funds.  They also sold PMS in the same way when it was Rs 5lakhs or 25lakhs ticket size.

As AIF has a significantly high commission and the ticket size is 1cr the earning is hopingly around 5% to 7% in many cases. Further, it has the option of charging a setup fee that is over and above the 5% or 7% commissions. Hence the earnings are enough mouth-watering.  Well, most of the wealthy outfits are running and expanding in crazy fashion in this business vertical.  The hiring of the team has gone crazy and also the industry pay package has gone up to an 80% hike now.  Well, a 50% hike in demand is now the most common.

But they are well-trained financial professionals and know the risk and explain the same to the client who also understands the same. But the irony or the slow death of the industry is being introduced aggressively by those distribution companies who are into B2B business models running Schemes of foreign travel.

We all know how the mutual fund industry expense ratio and control in pricing and also change in the pricing mode was introduced by SEBI in the last 15 to 18 years.  Miss selling by banks and by mutual fund agents now called advisors has led to the current status of the Rs 40lakhs cr industry size.

 Yes, these B2B people are selling the AIF and PMS products based on past performance and most surprisingly they are being offered contests like Spain Tour, Amsterdam, and Australia.  These provocative incentive schemes being run in distribution companies create immense miss selling opportunities, which is the birth of major issues.  Most of these PMS and AIF products are being sold based on past performance and the client is not aware of the risk levels of these products. Now when there is a loss in AIF during the initial year the client comes chasing the back of these brokers who propose an exit from these AIF in mid of the period of the fund tenure. The irony is that the client has to pay the exit load whereas the broker faces zero claw-back. In this case, the broker and the distribution company is the clear winner.

In many cases, most of the investors of these AIF and PMS products are being sold in complete darkness where a case of negative returns in initial times raises questions from the investors that even FD products give an 8% return.  When such points of comparison come from the investor it shows how these AIF and PMS products have been sold.   In many cases, it has been found that even AIF is being compared with Mutual Funds and are being sold in the market as a duplicate of MF. In one of our close interactions, it has been found that comparisons are being drawn between a small cap MF which has given a 30% return, and a small cap AIF that closed just 6 months has given a negative 20% return.

In many places, fancy names of AIF products have led to more confusion and the creation of more problems for investors. This has also been a boon for miss-selling by the brokers and so-called partners of the B2B platforms.  The depth of miss-selling has been so deep now that once the capital market tanks by 30% from the current levels all these past performance-based selling and lucrative incentive structures will come chasing as a nightmare to all manufacturers of these products.  Very soon we will find radical changes in AIF fee, expense, and earning structure change which will be just like Mutual Fund or PMS structure. 

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ELECTION 2024 OPPORTUNITY FOR NIFTY & INVESTORS-GO WITH FLOW NOT WITH PREDICTION

The New Year 2023 brings lots of hope for the Indian markets and Global too. The list of wishes is endless for the year 2023 and it begins 1^st with the expectation of war between Ukraine and Russia coming to end followed by the U.S. fed rate coming to a halt. Well we are not tarot card readers hence can’t comment on the fulfillment of these wishes but all we can say is that the world has learned a hard way what you mean by Independency from global supply chain risk.

 The fear of covid is not yet over and it haunts still as we enter the 2^nd year of celebration of the Virus Breakout. Indian markets have made investors jealous and frankly speaking, global investors don’t like Indian markets to be growing and getting independency from the clinch of FII’s money and getting soaked with DII’s money. The number of Demat accounts crossed the 110 million mark.

Lots of numbers prediction has been done for 2023 Nifty but the truth is that the real predicator is the investors who are parking money into the market. If we look at conservative estimates suggest that provident funds, pension funds, insurance funds, and SIPs could contribute at least $20 billion (Rs 1.65 lakh crore) to Indian equities in 2023. This outlook holds some merit as according to Association of Mutual Funds in India (AMFI) data, the SIP inflow for November was Rs 13,306 crore, a record high, with the total SIP AUM at Rs 6.83 lakh crore. Hence stop listening to these predictions and follow your financial advisor for investing.

The Indian economy has and will remain at every eye-catching point for global investors and we know from history that a cruel global political system will try to bring down this through various strategies creating political problems and instability. But we have a corruption-free government in place with strong reform measures followed by strong foreign policy management which gets India into a strong position. The biggest question of the investors for Indian markets is whether Indian markets will sustain the new highs or we will find a fall? Shall one invest in this market or one shall remain outside the purview of investments as of now?

Well, Indian markets will correct and will also reach new highs and they will remain volatile but will be creating new opportunities for creating wealth. This mind sounds diplomatic but the truth is that the Indian market is very important for the upcoming 2024 election. If the market remains robust and makes investors happy we know how it impacts our decision making at the same time the market will also correct since funding for 2024 will be done from this market only.  In the last 3 years, the only asset class where every inflow from political and no political segment came into the capital market. You will not find a robust correction but a volatile ride where one segment will pull out and the other segment will keep investing. This quarter we will find only an inflow of funds coming to us due to the end of the financial year, tax savings, etc will play a big role.

On the other side the end of the financial year profit booking cannot be ignored neither capital nor necessary business-related stock adjustment; advance tax payment will impact the market too due to redemptions. Hence investment opportunities as well as redemption both will run on the same track and on the same side.   At the same time, we will find sector readjustment of investment strategies keeping FY -24 in mind. The upcoming budget is going to be the last budget for this current government.  Next year before the election they will be coming up with only a provisional budget.

In FY-24 one will find significant opportunities for investing but only for those who don’t dream of market timing.  We all know in this year those who did market timing lost 25% return from the lows of 15200 levels of NIFTY. If we look at the market and more into the stocks we find that midcaps and small caps are significantly down and quality stocks are way too down compared to the Index. That means broader opportunity for investing is awaited and investing gradually at every fall will be a wise decision. The current market rally is riding on few horses and hence broader market rally is still awaited.  

Global inflation has started coming down and it’s expected that the FED rate halt will begin soon which will bring good news for the market and rally for the broader segment of the stocks. Further, any capital market-related good news in the budget will bring a complete swing for the market where you will find NIFTY inching into new highs. Well, new highs will also witness redemption and significant purchase by DIIs. Don’t predict the market direction since that prediction compass is very old now. Going and investing with the market flow is the new compass.

Once any of the global wishes come true we will find a completely new direction for the market. Now let’s come to predict what might get wrong for the Indian markets. Well, who has the money on the table decides the fate of the Indian markets and I can bet FIIs are no longer on the table. In fact, we don’t bother much about FII’s since the way DII’s book size is growing up. FIIs sold Indian stocks worth Rs 2.78 lakh crore in 2022. Meanwhile, DIIs remained net buyers last year, purchasing equities worth Rs 2.76 lakh crore. This number will grow as more employment gets into the country through PLI and Startup culture. 

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