Monthly Strategy Report

November 04, 2023

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Nifty Chart for October 2023

The Month Gone By

Indian stock market indices - Sensex and the Nifty 50 logged their worst month in 2023 as elevated US Interest rates triggered persistent sales by foreign investors, while a rise in oil
prices due to the Middle East conflict also added to the selling pressure. The concerns around the Middle East conflict have led a spike in the oil prices, a negative for net importers like
India. Rising bond yields, the Israel-Hamas war and profit booking ahead of state elections led to the benchmark indices posting their worst decline in 10 months. The Nifty fell 2.8 per
cent in October, and the Sensex by 3 per cent, their biggest fall since December 2022. Foreign Portfolio Investors (FPIs) were net sellers of Rs 21,680 crore in October. The pain was
more pronounced in the midcap stocks. The Nifty Midcap 100 declined 4.1 per cent, the steepest decline since June 2022. The stock markets were also hit by the underwhelming
earnings report and guidance from IT companies.

Key Positives during the Month

• The S&P Global India Services PMI increased to 61.0 in September 2023 from 60.1 in August, signaling a sharp upturn in output that was one of the strongest in over 13 years.
• The government's Goods and Services Tax (GST) collections climbed 13 percent year-on-year in October to Rs 1.72 lakh crore, second-highest revenue collection ever.
• India’s Wholesale Price Index (WPI) inflation rose in September but remained negative for the sixth consecutive month. WPI inflation stood at -0.26% for September against -0.52% in
August.
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• Growth in advances to agriculture and allied activities improved to 16.8 per cent (y-o-y) in September 2023 from 13.4 per cent a year ago.
• Sales of passenger vehicles in the domestic market stood at 3,61,717 units in September, marking an increase of 1.9 per cent compared with the corresponding period a year ago.
Sales of two-wheelers increased 0.8 per cent to 17,49,794 units.
• Industrial output as measured by the Index of Industrial Production (IIP) was 10.3% in August 2023. Factory output measured in terms of the IIP had contracted by 0.7% in August
2022.
• India's retail inflation, as measured by the Consumer Price Index (CPI), declined to a three-month low of 5.02% in September due to easing food prices. In July 2023, India's CPI stood
at 7.44%, while in August 2023, it was at 6.83%.
• India posted a merchandise trade deficit of USD 19.4 billion in September 2023, the lowest gap in five months. Imports fell by 15% year-on-year to USD 58.8 billion. Meanwhile,
exports shrank by 2.6% to USD 34.5 billion amid slowing global demand.
• India's domestic air traffic in September rose 18.3 percent compared to the same month last year. Domestic airlines carried approximately 1.23 crore passengers in September 2023.
• Railways achieved Freight Loading of 123.53 MT in September 2023- an improvement of 6.67% over last year freight loading for the same period. On cumulative basis from April –
September 2023, freight loading of 758.20 MT was achieved against last year loading of 736.68 MT.
• India's eight core sectors posted a growth of 8.1 percent in September - the lowest in four months. At 8.1 percent, the growth in India's eight key infrastructure industries it is lower
than August's 14-month high of 12.1 percent, which has now been revised up to 12.5 percent. In September 2022, core sector growth was 8.3 percent.
• Central government's fiscal deficit touched 39.3 per cent of the full year target in the first half of the current financial year, slightly higher than 37.3 per cent recorded in the year-ago
period. In actual terms, the fiscal deficit worked out at Rs 7.02 lakh crore at the end of September 2023.
• The Reserve Bank of India kept its benchmark policy repo at 6.5 percent for the fourth consecutive meeting in October 2023, in line with market expectations. The RBI also left both
the marginal standing facility (MSF) and bank rates unchanged at 6.75% while holding the standing deposit facility (SDF) rate at 6.25%.

Key Negatives during the Month

• India's manufacturing activity in October slipped to 55.5 in October, lowest in eight months, compared to 57.5 in September.
• The overall unemployment rate surged to 10.05 per cent in October from 7.09 per cent in September, marking the highest rate since May 2021. Notably, rural unemployment has
climbed to 10.82 per cent from slightly above 6 per cent, while urban unemployment has seen a modest decline to 8.44 per cent.
• The credit to industry grew 6.5 per cent (y-o-y) in September 2023 as compared with 12.6 per cent in the year-ago month.
• India's fuel consumption dropped 2% month-on-month in September. Total consumption in September totaled 18.18 million metric tonnes, down from 18.57 million tonnes in August.
However, it was up 7.6% compared with the same period a year earlier.
• India's monsoon rainfall this year was its lowest since 2018 as the El Nino weather pattern made August the driest in more than a century. Rainfall over the country during June to
September was 94% of its long period average, the lowest since 2018, the India Meteorological Department (IMD) said.
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Sector Moves/G-Sec Yield Moves Over the Month Global Markets
BSE Indices Oct-23 Sep-23 % chg BSE Indices Oct-23 Sep-23 % chg Indices Oct-23 Sep-23 %Chg
Healthcare 27,272 28,498 -4.3 US - Dow Jones 33,053 33,508 -1.4
Sensex 63,875 65,828 -3.0
IT 31,060 32,065 -3.1 US - Nasdaq 12,851 13,219 -2.8
Smallcap 36,919 37,562 -1.7
UK - FTSE 7,322 7,608 -3.8
Metal 22,239 23,206 -4.2
Midcap 31,245 32,341 -3.4 Singapore - Strait Times 3,068 3,217 -4.7
Oil & Gas 18,233 19,026 -4.2
500 26,605 27,408 -2.9 Japan - Nikkei 30,859 31,858 -3.1
Power 4,431 4,660 -4.9
200 8,355 8,613 -3.0 Indonesia - Jakarta Composite 6,752 6,940 -2.7
PSU 12,234 12,647 -3.3
India - Sensex 63,875 65,828 -3.0
100 19,558 20,123 -2.8 Realty 4,777 4,606 3.7
India - Nifty 19,051 19,638 -3.0
Auto 36,172 36,629 -1.2 TECK 13,966 14,471 -3.5
Hong Kong – Hang Seng 17,099 17,810 -4.0
Bankex 48,448 50,175 -3.4 G Sec Bond Yields 7.3 7.2 14bps
Germany - DAX 14,810 15,387 -3.7
Nifty 19,080 19,637 -2.8
Capital Goods 45,784 47,729 -4.1 Chinese - Shanghai composite 3,019 3,110 -2.9
Consumer Durables 44,308 45,360 -2.3 Brazil - Bovespa 113,144 116,565 -2.9
FMCG 18,518 18,679 -0.9

• World markets ended the month of October on a negative note. Singapore - Strait Times, Hong Kong – Hang Seng, UK - FTSE, Germany - DAX, Japan - Nikkei, India - Nifty and Sensex,
Chinese - Shanghai composite, Brazil – Bovespa, US – Nasdaq, Indonesia - Jakarta Composite and US - Dow Jones were down by 4.7%, 4.0%, 3.8%, 3.7%, 3.1%, 3.0%, 3.0%, 2.9%, 2.9%,
2.8%, 2.7% and 1.4% respectively during the month.

• The Straits Times Index (STI) slipped to finish well down despite data from China that exceeded market forecasts and hopes for diplomatic efforts to rein in the Middle East crisis. The
Singapore market benchmark index is down 4.7 per cent on the month. Investors took in news of the Israel-Hamas conflict, the resultant impact on equities globally, and rising
uncertainty amid the start of the corporate earnings season which added pressure on the Index. Further S-Reits, banks and real estate plays saw some of the biggest institutional
outflows, while industrials, telcos, technology and consumer cyclicals booked the most net institutional inflow which kept the Index in red.

• Hong Kong stocks plunged 4.0 percent in October, marking a third straight month of declines. dragged by its real estate and energy sector. The Hang Seng Index dropped due the poor
PMI print, amid China’s shaky economic recovery and rising geopolitical tensions in the Middle East. The Index registered losing month, as China's piecemeal approach to stimulus
failed to inspire the stock market. Foreign investors have sold more than 160 billion yuan of A shares in the past three months.
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• European markets logged the worst monthly performance since September 2022 in October, despite making gains on the last day of the month, as investors assess a flurry of
economic data and earnings. Britain's FTSE 100 ended October on a gloomy note dragged down by commodity-linked stocks with oil giant BP leading declines after it reported lower
than expected quarterly earnings. The commodity-focused FTSE 100 (FTSE) slipped and ended 3.8% lower for the month, marking its worst monthly performance since May.

• Japan's Nikkei share average fell, tracking declines on the Dow, as caution ahead of central bank meetings in the United States and Japan hurt risk appetite. Risks rose that the Israel-
Hamas war could mushroom into a wider conflict, with Washington warning of a significant risk to U.S. interests in the region and announcing a new deployment of advanced air
defences.

• Chinese stocks fell to a 12-month low as foreign investors continued to dump yuan-denominated shares. Foxconn Technology Group’s mainland-listed arm tumbled on reports the
company’s factories were being investigated by the government.

• The US stock market surged in the first seven months of the year, driven by enthusiasm about artificial intelligence and optimism that the Federal Reserve was approaching the end of
its campaign to raise interest rates. However, later it recorded its third consecutive month of declines, the longest monthly losing streak since the outbreak of the coronavirus
pandemic in early 2020. The Dow and the S&P 500 fell 1.4% and 2.2%, respectively. The tech-heavy Nasdaq declined 2.8% in October, also notching its third consecutive negative
month. October’s losses come amid a rapid rise in Treasury yields. Market participants attribute the rise to several factors, including concern the Federal Reserve will keep interest
rates higher for longer.

G-Sec Market:
• Indian G-Sec yields rose by 14 bps during October 2023, to end the month at 7.35%. Bond yields climbed sharply as market participants were surprised by RBI’s announcement to
conduct open market sale of bonds through auction. High U.S. treasury yields and rising crude oil prices extended the losses. However, losses were reversed and prices increased as
market participants went for value buying to take advantage of the recent rise in yields. Fall in domestic retail inflation helped to extend the gain further.
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Fund Activities

Net Buy / Sell Net Buy / Sell Open Interest Open Interest
Remarks
October-23 September-23 October-23 September-23
FII Activity (Rs in Cr) FII Activity
Equities (Cash) -22113.0 -18893.8 - - FIIs were large net sellers in October-23
Index Futures -6016.3 -6608.3 17525.9 12109.9 FIIs were net sellers with a rise in open interest
Index Options -295543.7 -273419.4 344480.1 248552.5 FIIs were net sellers with a rise in open interest
Stock Futures -1413.8 4095.6 170539.3 188299.4 FIIs were net sellers with a fall in open interest
Stock Options -1252.1 -1235.1 9393.7 8553.6 FIIs were net sellers with a rise in open interest
MF Activity (Rs in Cr) MF Activity (Rs in Cr) (Till 18thOctober 2023)
Equities (Cash) 13877.6 20842.6 - - MFs were net buyers in October-23
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• FIIs were net buyers in the debt market, buying a net amount of Rs 6321.3 cr in October 2023 as compared to net buying of debt worth of Rs 1627.5 cr in September 2023. Mutual
funds were net sellers of debt papers, selling Rs 938.1 cr in October 2023 (till 18th October 2023) as against Rs 8777.3 cr of net selling in September 2023.

• The average daily volume on the BSE in October 2023 fell by 19.4% MoM. NSE’s daily average volume fell by 16.6% MoM. The average daily derivatives’ volume on the NSE fell by
3.8% MoM to Rs 31,886,840 cr in October 2023, the first monthly drop in volumes in 12 months.

Commodities
Commodity Oct-23 Sep-23 % Chg • In October 2023, the Reuters/Jefferies CRB Index of 19 raw materials fell by 1.2% to close at 281. The fall was due to decrease in Crude Oil
Gold 1994.3 1866.1 6.87 (down 10.8%), Lean Hogs (down 9.4%), Cotton (down 7.9%), Corn (down 4.3%), Nickel (down 2.1%) and Aluminum (down 1.5%). However,
Crude Oil 81.0 90.8 -10.76 Copper, Soybeans, Live Cattle, Silver, Sugar, Coffee, Gold, Cocoa, Orange Juice, Natural Gas and Wheat were up by 0.1%, 0.7%, 0.8%, 2.2%,
Aluminium 2251.5 2286.5 -1.53 3.2%, 5.1%, 6.9%, 11.8%, 18.6%, 22.2% and 25.3% respectively.
Copper 8110.5 8100.5 0.12
Zinc 2429.5 2602.0 -6.63 • Gold prices ticked higher and headed for gains, supported by continued safe-haven demand fuelled by Middle East tensions, while
Nickel 18130.0 18510.0 -2.05 investors awaited the U.S. Federal Reserve policy meeting. Gold has been holding nearly all of its recent gains as the market remains
Tin 24079.0 23900.0 0.75 extremely concerned about a conflagration in the Middle East.
Lead 2085.0 2197.0 -5.10
• Oil prices eased as markets worried less about potential supply disruptions from the Middle East conflict and on data showing rising
output from OPEC and the United States. Crude oil prices dropped also due to concerns about energy demand, exacerbated by
disappointing manufacturing activity in China.
• Copper prices rose driven by a global
refined copper market deficit of • Zinc experienced a decline, largely influenced by China's economic challenges. China's manufacturing PMI dropped to 49.5 in October,
33,000 metric tons in August. Prices indicating a fragile recovery. Price declined on worries over shortages of zinc refining capacity.
rose due to measures to support the
economy of top metals consumer • Nickel prices fell pressured by a surplus in the global market. Other nonferrous metals also declined as a firmer dollar makes greenback-
China, stronger demand and a priced commodities more expensive in other currencies.
relatively weak dollar, with investors
focused on upcoming U.S. inflation • Aluminium prices experienced a decline, as China's manufacturing sector unexpectedly contracted in October. This setback raised concerns
data. despite recent signs of economic recovery in the world's second-largest economy. Prices also fell resulting from the continued
strengthening of the US dollar index and expectations of overseas interest rate hikes.
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Currencies
• Given below is a table that shows the depreciation (-)/appreciation (+) of the US Dollar against various currencies in October USD to: Oct-23 Sep-23 % chg
2023. The dollar rose against a basket of currencies on as a slew of fresh economic data highlighted the strength of the U.S. Pakistani rupee 281.59 288.30 -2.3
Hong Kong dollar 7.82 7.83 -0.1
economy relative to the United Kingdom and the European Union. U.S. dollar was modestly higher against a basket of
Chinese yuan 7.32 7.30 0.2
currencies after data showed the U.S. economy grew at its fastest pace in nearly two years in the third quarter, once again
Indian rupee 83.26 83.03 0.3
defying dire warnings of a recession that have lingered since 2022. Taiwan dollar 32.47 32.23 0.7
Singapore dollar 1.37 1.37 0.3
• Turkey’s Lira tumbled after President Recep Tayyip Erdoğan stepped up his criticism of Israel and its allies at a time when Argentine peso 349.95 350.00 0.0
Ankara is desperate to secure western investment to fuel its economic overhaul. Euro 0.95 0.95 -0.1
Thai baht 36.14 36.51 -1.0
• Indonesia's rupiah pared losses after the central bank unexpectedly raised interest rates. Bank Indonesia surprised markets Malaysian ringgit 4.76 4.69 1.5
by hiking the benchmark 7-day reverse repurchase rate by 25 basis points to 6.00%, its second hike this year, with an Indonesian rupiah 15880.00 15450.00 2.8
Japanese yen 151.67 149.35 1.6
intention to strengthen the rupiah's stability amid global uncertainty. A rising United States dollar is putting pressure on
Brazilian real 5.06 5.01 1.0
other currencies and has sent the Indonesian rupiah to its lowest level this year. South Korean won 1352.15 1352.31 0.0
Russian Rouble 93.40 97.97 -4.7
• The yen plummeted across the board, dropping to a 15-year low against the euro and a new one-year trough versus the Turkish Lira 28.31 27.41 3.3
dollar, after a minor step adopted by the Bank of Japan (BOJ) toward ending years of monetary stimulus failed to appease South African Rand 18.64 18.92 -1.4
some investors who had expected a bigger move.

• The Malaysian ringgit fell to its lowest level since the Asian Financial Crisis as the currency was weighed down by the nation’s widening rate differential with the US.

• The Russian rouble rose after the country's authorities obliged some exporters to sell foreign currency to stabilize the exchange rate.

• The Pakistani rupee has become the top performer in global currency markets. It gained from a record low in early September, after a government clampdown on illicit dollar trade.

• The South African rand jumped against a weaker dollar as market sentiment improved, despite ongoing tensions in the Middle East. The rand jumped on the back of improved risk
sentiment and a drop in U.S. Treasury yields.

• The Indian rupee fell against the U.S. dollar marking its lowest level in one year against the greenback. The rupee's drop comes amid rising concerns about oil prices and as investors
wait to see if the ongoing conflict in the Middle East draws in other countries. A weak trend in domestic equities, persistent foreign fund outflows and rise in crude oil prices weighed
on the local unit.
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Outlook Going Forward

Israel Hamas conflict
• There seems to be an increased risk of a global recession before the end of next year, after the start of the Israel-Hamas war in early October. A quick ceasefire between Israel and
Hamas, as seen in the past, is unlikely as it’s a war between Israel and Iran.
• For Israel, it is existential. This time, Israel’s goal is to wipe out Hamas, which is Iran’s surrogate in Gaza. The war is also existential for Iran’s mullahs, who need it to distract the
population from discontent over their authoritarian regime by moving forward on their machinations to wipe out Israel.
• If oil prices rise higher for longer, the global economy could feel a resurgence of inflation during a period when investors are hoping inflation is clearly decelerating. In general,
markets tend to have difficulty pricing the difference between a temporary shock and a permanent shock.
• A direct role by Iran, a longtime ally of Hamas, would raise the threat of a broader conflict.
• Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration
pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.
• Any warming of relations between Iran and the West is now on hold and this will limit incremental oil supply.
• While neither Israel nor Gaza are major oil producers, everything that happens geopolitically in the Middle East invariably ends up affecting oil prices.
• If this conflict remains contained between Israel and Hamas, that probably won’t have larger ramifications on financial markets in the longer term. However, if this conflict spreads to
other regions, that could cause a rise in oil prices and that would be inflationary and would affect what the Fed is trying to do.
• Experts cite the ongoing war in Ukraine as well as the attacks Hamas launched on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical
relationships. Beyond the military conflicts, the burgeoning national debt and “the largest peacetime fiscal deficits ever” that are raising the risks that inflation and interest
rates remain high. Along with the high rates, the Federal Reserve’s efforts to reduce its bond holdings, known as quantitative tightening, reduces liquidity in the system at a time when
market-making capabilities are increasingly limited by regulations.

Developed economies – facing multiple challenges

• Record debts, high interest rates, the costs of climate change, health and pension spending as populations age and fractious politics are stoking fears of a financial market crisis in big
developed economies.
• A surge in government borrowing costs has put high debt in the spotlight, with investors demanding increased compensation to hold long-term bonds and policymakers urging
caution on public finances.
• Over 80% of the $10 trillion rise in global debt in the first half to a record $307 trillion came from developed economies, the Institute of International Finance says.
• The United States, where brinkmanship around a debt limit brought it close to a default, Italy and Britain are of most concern, more than 20 prominent economists, former
policymakers and big investors told Reuters. They do not expect a developed economy to struggle paying debt, but say governments must deliver credible fiscal plans, raise taxes and
boost growth to keep finances manageable. Heightened geopolitical tensions add to costs.
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• Italy's 2.4 trillion-euro debt pile is the focus in Europe, where the IMF has said high debt leaves governments vulnerable to crisis. Its debt risk premium jumped in October as it cut
growth and hiked budget deficit forecasts. Scope Ratings warned Italy could be ineligible for a crucial ECB bond-buying scheme. A tipping point is Italy's potential to lose
investment-grade ratings. Moody's rates it one notch above junk with a negative outlook. Moody's reviews Italy in November. Low growth has kept Italian debt high, a risk across
Europe and Britain, where belt-tightening plans will depress public investments.
• Debt is near or higher than 100% of output in Britain, the United States and Italy. Ageing populations, climate change and geopolitical risks such as wars in Ukraine and the Middle
East mean significant spending pressures ahead. Interest payments surging with high rates add to the pressure. U.S. net interest payments will rise from 2.5% to 3.6% of GDP by
2033 and 6.7% by 2053, the Congressional Budget Office estimates.
• It is naïve to assume that the largest credit-fueled bubble in half a century can continue indefinitely or be deflated without pain. Higher interest rates, if they continue for long
enough, will force an adjustment, one way or another, to popular investments that were made based on comically low costs of capital.

Emerging markets bond yield – earnings yield portending tough times for EMs ?
• The slump in US Treasuries has exacerbated a selloff in developing-nation debt,
sending the yield on bonds in the Bloomberg EM Aggregate Sovereign Index (in red
above) to a one-year high of ~9%. That equals the earnings yield of ~9% (in blue
above) on stocks in the equities benchmark, the MSCI Emerging Markets Index.
• That upsets the typical relationship between bond and stock yields, with equities
normally offering a higher rate to compensate for their additional risk. In emerging
markets, this premium has typically hovered in the 2-6 percentage-point range over
the past two decades, but turned zero or negative twice: during the global financial
crisis in 2008 and the Covid-driven rout of 2020. On both occasions, emerging-
market losses didn’t abate until US yields started falling.

Rising US yields – impact

• A rout in government bond markets deepened with benchmark U.S. yields hitting fresh 16-year highs as investors bet that persistently high interest rates will slow world growth and
dampen the appetite for riskier assets.
• When will rising yields become a problem leading to a potential default risk? The answer is when the profit/growth cycle turns negative.
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• Because the $25-trillion Treasury market is considered the bedrock of the global financial system, soaring yields on U.S. government bonds have had wide-ranging effects. The S&P
500 is down about 8% from its highs of the year, as the promise of guaranteed yields on U.S. government debt draws investors away from equities. Mortgage rates, meanwhile,
stand at more than 20-year highs, weighing on real estate prices.
• Higher Treasury yields can curb investors' appetite for stocks and other risky assets by tightening financial conditions as they raise the cost of credit for companies and individuals.
• With some Treasury maturities offering far above 5% to investors holding the bonds to term, rising yields have also dulled the allure of equities. High-dividend paying stocks in
sectors such as utilities and real estate have been among the worst hit, as investors gravitate toward government debt.
• Shares of tech and growth companies, whose future profits are discounted more sharply against higher yields, have also suffered.
• Another upshot of the surge in yields has been a rebound in the dollar, which has advanced an average of about 7% against its G10 peers since the rise in Treasury yields
accelerated in mid-July. The dollar index, which measures the buck’s strength against six major currencies, stands near 10-month highs.
• A stronger dollar helps tighten financial conditions and can hurt the balance sheets of U.S. exporters and multinationals. Globally, it complicates the efforts of central banks to
tamp down inflation by pushing down other currencies.
• With little clarity on the trajectory of interest rates and U.S. fiscal problems brewing, few expect the volatility in bonds to subside anytime soon.
• The Fed has signaled it will keep rates elevated through 2024, though investors see cuts as early as June 2024.

US AAA Credit rating – in danger of downgrade?

• Wall Street is preparing for the potential demise of an old regime: The U.S. government’s coveted AAA credit ratings.
• Earlier controversies on Capitol Hill over the U.S. debt limit prompted downgrades by S&P Global in 2011 and Fitch Ratings in August 2023 to AA+ from AAA, leaving Moody’s
Investors Service as the only major credit-rating firm applying its top credit ratings to the U.S. But perhaps not for long.
• The US narrowly averted a disruptive and costly shutdown of federal agencies as Congress passed compromise legislation to keep the government running until Nov. 17. Another
shutdown would cast doubt on the ability of the U.S. to retain its last batch of flawless credit ratings, a go-to gauge of its trustworthiness on the global stage. It also could further
rattle the roughly $25 trillion U.S. Treasury market, where yields recently surged to a 16-year high.
• Moody’s warned in late September that a government shutdown “would be a credit negative for the U.S. sovereign.” The rating firm also said “intensifying political polarization”
was a concern, as well as fiscal policy-making that’s “less robust” in the U.S. than in many of its AAA-rated peers, including Germany and Canada.
• The guidance Moody’s gave ahead of the stopgap funding measure reverberated language used a decade ago by S&P Global in its downgrade, which could signal its readiness to
pull the trigger on a U.S. downgrade if a shutdown comes to pass.
• Moody’s, like S&P Global, may be placing less focus on the sustainability of U.S. debt, which has now topped $33 trillion, than on dysfunction in the “decision-making process” of
elected officials. Moody’s declined to comment.
• Even before the latest political trouble in Congress, the 10-year Treasury yield had been sharply climbing, making it more expensive for the U.S. government to borrow. The latest
repricing in the world’s biggest bond market has been partly attributed to the Federal Reserve’s actions in late September, when it signaled that interest rates could stay higher for
longer than previously anticipated.
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US – large deficits unsutainable

• The U.S. government posted a $1.695 trillion budget deficit in fiscal 2023, a 23% jump from the prior year as revenues fell and outlays for Social Security, Medicare and record-high
interest costs on the federal debt rose. The Treasury Department said the deficit was the largest since a COVID-fueled $2.78 trillion gap in 2021. It marks a major return to
ballooning deficits after back-to-back declines during President Joe Biden's first two years in office. The budget deficit is large not only in absolute terms, but also relative to the size
of the U.S. economy. The 2023 shortfall came in at 5.3% of GDP, well above the average 3.8% seen over the past 40 years, according to data from the Office of Management and
Budget.
• The deficit comes as Biden is asking Congress for $100 billion in new foreign aid and security spending, including $60 billion for Ukraine and $14 billion for Israel, along with funding
for U.S. border security and the Indo-Pacific region.
• The big deficit, which exceeded all pre-COVID deficits, including those brought about by Republican tax cuts passed under Donald Trump and from the financial crisis years, is likely
to enflame Biden's fiscal battles with Republicans in the House of Representatives, whose demands for spending cuts pushed the U.S. to the brink of default in early June over the
debt ceiling.
• For the 2023 fiscal year, total revenues fell $457 billion, or 9% from fiscal 2022, to $4.439 trillion, largely due to a drop in non-withheld individual income tax payments amid a
worse performance in stocks and other financial assets as interest rates rose. Fiscal 2023 outlays fell $137 billion, or 2% from the prior year to $6.134 trillion. Outlays would have
been more modest were it not for large increases in spending on retirement and healthcare benefits for the elderly and in debt service costs. Social Security spending rose 10% to
$1.416 trillion due to cost of living adjustments for inflation, and spending for the Medicare senior healthcare program rose 4% to $1.022 trillion.
• Interest costs on the more than $33 trillion in federal debt also rose sharply, up 23% to $879 billion, a record. Net interest payments, excluding intra governmental transfers to trust
funds, rose 39% to $659 billion, also a record, according to a Treasury official.

If recession in US – is there too much to worry ?

• Many Wall Street economists had anticipated that the U.S. recession would slide into recession earlier this year. However, strength in construction, consumer spending and other
areas has helped it defy expectations, as data show it has instead continued to expand at a solid pace.
• A much-talked-about U.S. recession has yet to arrive after more than a year of forecasts and speculation, and now chief market strategist Joseph Quinlan at Bank of America’s
wealth unit spells out why investors shouldn’t fret even if one finally comes. Historically speaking, recessions don’t tend to last very long and “can be favorable entry points” for
stock investors, They have lasted 10 months on average since World War II and haven’t stopped the S&P 500 index from bouncing back with solid returns in a matter of months.
Across the 12 U.S. recessions that have occurred after 1945, the S&P 500 managed to start bouncing back from a trough even while the economy was still technically mired in a
downturn. From the time stocks hit that trough, the index has seen a three-month average return of 19.7%, a six-month average return of 28% and a 12-month return of 43.7%.
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• The S&P 500 tends to peak, on average, up to 13 months before a

recession begins. Thereafter, it tends to find a bottom some time before
the official end to the downturn, and even starts to recover while the
data are still showing a contraction in output, he added.

SOURCE: BLOOMBERG DATA AS OF OCT. 18. CHART REFLECTS AMOUNT OF TIME THAT U.S. HAS SPENT IN OR OUT OF A RECESSION, AS WELL AS S&P 500 RETURNS, DURING AND AFTER RECESSIONS SINCE WORLD WAR II.

Bitcoin- back in favour?

• Bitcoin rose further on Oct 24, amid continued optimism that an exchange traded fund
based on the crypto will be soon approved in the U.S. Bitcoin rallied as
investors celebrated incremental steps that might bring bitcoin ETFs closer to the
market, with anticipation that the U.S. Securities and Exchange Commission will approve
them soon, after repeatedly rejecting such applications in the past, citing their
vulnerability to market manipulation.
• The cryptocurrency rose more than 28.5% in October to as high as $35,198, the loftiest
level since May 2022. “We believe the market has started to price in an approval as the
base case,” analysts at QCP Capital wrote in a note.
• Some investors are also turning to bitcoin as a potential safe haven asset, as the Israel–
Hamas war intensifies. A short squeeze, where traders with short positions are forced to
buy bitcoin to cover their losses, also contributed to the rally,
 | Monthly Strategy Report

Gold - outperforming S&P 500

• Gold is officially outperforming the S&P 500 stock index in 2023 due to an
October rally that has brought the price of an ounce of the yellow metal to just
above the $2,000 mark, a level it hasn’t seen since May.
• Metals traders attributed gold’s gains to a surge in demand for hedges and
safety plays following Hamas’s Oct. 7 attack on Israel, which provoked a war
between Israel and the group that is deemed a terrorist organization by the
U.S. and European Union.
• Gold also outperformed stocks in 2022. While front-month futures finished
the year marginally lower, the losses were much more modest than the 19.4%
drop in the S&P 500, a figure that excludes dividends. Gold also outperformed
stocks in 2020, when gold futures rose 24.4% compared with the S&P 500’s
16.3% gain

Global uncertainties
• Even in the highly unlikely event that the geopolitical situation improves rapidly in the region and beyond, a deep sense of uncertainty will remain, driven by some specific economic
and financial factors.
• First, the global economy’s major growth engines are under strain. With Europe teetering on the brink of recession and China stalling, the U.S. economy has emerged as the main
driver of global growth. Over the past 15 months, the consensus of analysts about the U.S. economy’s direction has oscillated wildly between four scenarios: soft landing; hard
landing; crash landing, and no landing.
• Advances in generative artificial intelligence, life science and clean energy have the potential to enhance productivity and boost GDP growth significantly. On the other hand, there is
the risk that a set of vicious cycles will aggravate cascading effects.
• Second, the most immediate risk is the recent spike in global borrowing costs as markets adapt to the likelihood that the U.S. Federal Reserve and other major central banks, having
hiked interest rates aggressively — albeit belatedly — to counter inflation trends they initially misdiagnosed will maintain elevated rates for an extended period.
• Third, the persistence of this interest-rate outlook increases the risk of recessions and financial-market turbulence.
• As economic-policy tools become more subordinate to political and geopolitical considerations, the already weak outlook for global growth may well deteriorate. Moreover, shrinking
central-bank balance sheets and the absence of an effective policy framework compound the challenge of determining the right inflation targets in a world economy characterized by
an insufficiently flexible supply side.
 | Monthly Strategy Report

China – is it too early to get excited about revival in its economy?

• China’s economy is showing signs of stabilizing but the improvements are decelerating. That could leave it in an L-shaped recovery—where the economy doesn’t see an upturn—that
is unlikely to excite investors.
• China’s recovery from three years of Covid restrictions has underwhelmed, there are concerns about the country’s longer term growth prospects, and geopolitical tensions loom.
• While most analysts expect China to hit its 5% economic growth target, that may keep officials from bigger stimulus efforts, resulting in a recovery that is still anemic.
• Indeed, a spate of October data from independent research firm China Beige Book show areas such as the property market still struggling to find a bottom, while there has been a
slowdown in consumer spending.
• Housing sales have softened in October from a month earlier and commercial real estate has had its worst showing this year. Both factory production and domestic orders also
slowed.
• Consumer spending is cooling, with households pulling back from big-ticket items including cars and appliances. They also are reducing their revenge spending on travel and dining out
in recent months, according to China Beige Book.
• Still, analysts are feeling more confident Beijing will do what is needed to create some stability, especially after it approved an additional $1 trillion renminbi government bond
issuance to support infrastructure investment.
• The debt will be issued not by local governments but by the sovereign, pushing headline deficit to 3.8% of GDP. It is a surprise move indicating political will to put a floor under
economic activity, but also the latest signal of pain in the economy, says TS Lombard’s Rory Green in a note to clients.
• Over recent decades, China has dominated discussions of emerging markets, for good reason. But when you factor in an aging and shrinking population, slowing economic growth, the
difficulties in obtaining information about local companies and continuing geopolitical tension, it is time for investors to expand their search to other developing countries, and India is
the next largest among that group.

India – less impacted by the turmoil in the globe- so far.

• Global investors believe that if you would like to have investment exposure to a tremendous emerging market with good prospects for rapid growth over coming decades, you should
look at India.
• India is the fifth-largest economy, according to the World Bank. India stands out as an emerging market for the size of its economy, its economic growth rate and its projected
population growth. Through 2050, five of the 10 largest economies are expected to see their populations decline.
• Morgan Stanley has recently upgraded India to 'standout overweight' citing that the relative economic and earnings growth is improving and the macro-stability setup looks sufficient
to withstand the higher real rate environment.
• Foreign brokerage CLSA has upped India portfolio allocation to 20 per cent above the MSCI benchmark against 40 per cent underweight earlier. India now accounts for 18.2 per cent of
CLSA portfolio weight against 15.2 per cent weight it carries in the MSCI benchmark.
• JPMorgan upgraded India's rating to 'overweight' from 'neutral' citing seasonal impact of Lok Sabha elections and the strongest growth among emerging markets. . India also offers
the "strongest EM GDP compounding", JPMorgan said, citing demographic trends and infrastructure investment needs.
 | Monthly Strategy Report

• The valuations of the Nifty-50 Index are more reasonable at 17.5X FY2025E EPS in the context of moderate earnings growth.
• Key factors to monitor in H2FY24 for Indian markets include weather conditions especially the development of El Nino, leading to an unusual rise in rural stress; worsening geopolitical
situation in Europe and Asia; some large Lehman-like credit events causing a market wide selloff; a hard landing in the US economy; sharp rise in credit cost for lenders in India.
inflation remaining sticky at high levels; sharp drop in the popularity of incumbent leadership prior to the 2024 general elections.
• The earnings momentum in India may slow as export demand and rural demand conditions remain uncertain. The present forward valuations are close to long-term averages based
on still marginally optimistic earnings forecasts. A slight PE derating is also probable in H2FY24, but any major negative surprise is not likely. Marketcap to GDP ratio for India is high at
the moment -109 vs 18 year average of 80 and 113 in FY22.
• Investors need not be complacent and should do asset allocation review to cut back excess allocation to equities. Also within equities they need to do a portfolio review to weed out
non performers and taking part profits in stocks that have run more than deserving. This will enable them to raise some cash which can be deployed later in weak times.
 | Monthly Strategy Report

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