Outlook for FY25 and key learnings from FY24 | Wright Research

Performance of smallcases in FY24

• Our smallcases achieved strong results in FY24, exceeding the performance of most benchmarks. Our newly launched Alpha Prime shone delivering stellar performance of close to 70% return in 9 months.
• The Balanced strategy stood out with a return of 79.3%, significantly outperforming the Multi Cap Index by nearly 25%. Similarly, the New India strategy delivered an impressive 118% return. While the Momentum strategy also yielded positive results at 68.5%, the Smallcaps strategy gave a 118% return when the Small Cap Index gave 50% returns.
• Notably, thematic approaches like concentrated momentum and new India manufacturing thrived, exceeding the Small Cap Index by a substantial margin. This overall success can be attributed to our initial focus on momentum and smallcaps, alongside the effectiveness of specific themes. The risk in these strategies ended up being lower than the benchmarks thus shining on a risk-adjusted basis also.

Investment Strategy followed for smallcases in FY24

During FY24, our portfolio management exhibited a dynamic approach.

• Initially, we leveraged a momentum strategy, capitalizing on favorable market trends. This is evident in the strong performance of the Momentum smallcase. Additionally, a significant allocation towards smallcap stocks at the beginning of the year drove returns, particularly in the Smallcaps and New India smallcases.
• However, the year also saw a strategic shift towards larger, more stable companies. This is reflected in the reduced exposure to smallcaps and PSU stocks later in the fiscal year.
• Overall, our strategy demonstrates a tactical allocation mindset, adapting to changing market conditions. Our strategies have a multi factor approach and a mix of momentum, value and quality worked, the “New India” theme exemplifies a thematic approach that yielded positive results

Market Trends & Themes which took the spotlight in FY24

• The success of our smallcases in FY24 can be attributed to a confluence of factors.  Momentum, as a market trend, played a significant role. The concentrated momentum strategy demonstrably captured favorable market movements, reflected in its strong performance.
• Additionally, our initial focus on small and mid-cap companies drove returns, particularly in the Smallcaps and New India smallcases. These sectors likely experienced positive tailwinds.  Furthermore, the “New India” theme, indicating a focus on specific industries or companies aligned with India’s growth trajectory, proved successful.
• Top stock picks in sectors like infrastructure, manufacturing, and PSUs (Public Sector Undertakings) likely contributed significantly. Overall, a combination of capitalizing on momentum, strategic allocation to smallcaps, and successful thematic selection fueled the outperformance of our smallcases.

Sectors and Industries to track in FY25

• In FY25, our focus seems to be shifting towards MNCs, Large Caps in Consumer Staples, Banking, Finance, and Autos. This aligns with a potential tilt in our smallcase allocation strategy towards larger, more established companies. The optimism likely stems from their stability, especially during pre-election years, along with their maturity and consistent growth potential.
• Additionally, consumer staples and autos might benefit from a growing economy and rising disposable incomes. This sector focus suggests a potential reduction in exposure to small and mid-caps compared to FY24.

Potential shifts in sector allocation one can expect in FY25 compared to FY24

• We expect a notable shift in sector allocation for FY25 compared to FY24. The focus seems to be moving towards large, stable companies in MNCs, Consumer Staples, Banking, Finance, and Autos. This aligns with the upcoming Indian elections in FY25, which often introduce market volatility.
• Instead of the initial emphasis on small and mid-caps in FY24, we can expect a decrease in their allocation. This shift prioritizes sectors with lower risk profiles, like large caps, offering more stability during elections.
• Additionally, established companies in these sectors likely boast strong fundamentals and consistent growth potential. Finally, consumer staples and autos might benefit from factors like economic growth and rising disposable incomes, acting as further drivers for this allocation change.
• Overall, FY25’s strategy appears more conservative, prioritizing stability and long-term growth over the prior year’s focus on momentum and smaller companies.

Various risks foreseen for the Indian markets

• While our outlook for FY25 is cautiously optimistic, there are potential risks to consider for the Indian market. The upcoming Indian elections in FY25 could inject volatility into the market. Investor sentiment often fluctuates during this period.
• Additionally, currency fluctuations, particularly a depreciation of the rupee, could impact foreign investments and raise import costs for companies.
• Furthermore, a delay in anticipated interest rate cuts by the US FED and the RBI could dampen market enthusiasm.
• On a broader scale, a global recession or a flare-up in commodity prices due to geopolitical events are potential external risks that could influence the Indian market and require close monitoring.

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