D-Kode Monthly Market Outlook for August 2026 by Mr Nilesh Shah

[00:00:00] Speaker 1: If you look at global economy, the global wealth has reached 570 trillion led by America and China. Surprisingly, Indian households have more precious metal and stone than all the nations – Mexico, Belgium, Sweden, Austria and so on and so forth. While wealth has increased, so has debt, household debt, financial debt, government debt. Combined now is almost 300% of GDP. As debt has increased, so has the financing cost. In both emerging market as well as global market, number of central banks' hiking rates are exceeding number of central banks' cutting rates. Consequently, short-term interest rates which were near zero post-subprime crisis, post-COVID crisis have now started inching up to mid-single digit. As monetary policy is tightening, so is fiscal policy. In many countries, budgeted deficit which had gone towards stimulus is now moving towards austerity. In some sense, global growth card is getting break from both fiscal as well as monetary side. Japan illustrates this far better, where government has cut down on deficit and move towards primary surplus. In some sense, global growth, global trade as a percentage of GDP continues to flourish. It did get hit during COVID as transportation became difficult, but it rebounded strongly. And the globalization despite several hiccups from tariffs in the last few years has continued. In some sense, that buoyancy in trade is pushing investors' expectation on economy. The number of investors expecting stronger economy continues to remain more than the number of investors expecting slowdown. To some extent, geopolitical crisis in Middle East has not impacted oil price as well as oil supply. This is why the future chart of oil continues to remain towards 70% handle. Put together, this is one of the reasons why global growth expectations remain positive. To some extent, lower crude prices are also reflecting shift in one of the largest importing continent, Asia, towards renewable energy, towards independence, net-net. Despite all the ups and downs in geopolitics, investors continue to remain positive towards equity market as well as towards global growth. Coming to Chinese economy, which seems to be doing well over the decades, they continue to run large exports. Their trade surplus is expected to touch $1.3 trillion. There are very few countries whose exports is in excess of $1 trillion. In automobile, China has taken a leap. What they were exporting in 2020, in six years, they are exporting more than five times. Unlike China, China has become export powerhouse. Despite exports growing so strongly, partly because of base effect and the larger base, GDP growth for June quarter came down to about 4.3%. While Chinese economy has done well, their corporate profitability has remained subdued. Their companies focus more on investment and less on profitability. There is no surprise that for the last 17 years, CSI 300 index has remained at the same level. The level seen in the heydays of Jan 2008 is not yet been breached, even in July 2026 on CSI 300 index. Chinese economy is slowing down on investment. Their capacity utilization remains low on traditional products as capacities have been built. However, on the artificial intelligence side, China has invested far more smartly. Their combined investment across the telecom and internet major is substantially lower than what 4 US hyperscalers are making. And despite that, usage of Chinese AI model is now outpacing American models by a margin. Their tokens are much more cheaper. Some of the LLMs are on open source. Cost as well as open source bringing transparency is pushing Chinese models far aggressively compared to US models. Partly because of this AI trade, equity flows into China have started showing improvement. Undoubtedly, like India, China also is facing youth unemployment issue. In US, despite launch of Chad GPT, unemployment remains well under control. But in countries like China as well as India, unemployment remains an issue. Apart from unemployment, when jobs have been created, challenges, well-paying jobs across China, in many industries, wages have actually de-grown in real terms. So, China, like many of the emerging market peers, is facing challenge of low-paying jobs and unemployment combined. Coming to US economy, the Supreme Court ordered US government to pay tariffs which they had levied earlier. Now, US has imposed some tariff under some other law. But both for May and June, tariffs refunded by US government is more than what they are collecting by way of net tariff. US GDP growth in June quarter is expected around 1.5%. That's significant slowdown compared to last year. This is despite the fact that investments in IT and software is at all-time high. It's almost more, it is actually more than what was done during the dot-com era. A large part of this IT investment is driven in data center and GPUs. The hyperscalers capex in 2025 was around $400 billion. In 2027, it's expected to more than double. AI capex now accounts for almost 80% of US incremental GDP growth. The GDP growth is largely dependent how hyperscalers are investing in artificial investment. AI capex is now reaching unprecedented level. It's exhausting all the cash flow generated by hyperscalers. They are turning into negative free cash flow. That means they are investing more than what they are generating by way of cash flow. They have to fund investments now by debt. In 2023 or 2024, their borrowing was less than $20 billion. In 2026, it's expected to be 10 times more at $200 billion. When these companies come to borrow on such a large scale, 10x growth in three years, undoubtedly, credit spreads widen. Someone like Meta has much higher credit spread compared to, let's say, someone like Alphabet, Google. But net-net credit spreads have widened on all the hyperscalers because of their large investment plan. The race is not going to end over the next couple of years. Total investment in AI could be about $5.5 trillion. $1 trillion will come from cash flow. Rest of the money will have to come from bond market or equity market. If this was not sufficient, there are analysts who are expecting that a large part of AI debt is actually kept on an off-balance sheet item. The off-balance sheet debt at $1.65 trillion by way of committed leases is more than what is reported on balance sheet. This cartoon summarizes the trade on artificial intelligence. Right now, everyone is powering money and hoping that there will be some payout. Against the background of AI, U.S. Fed is trying to maintain its credibility. For the last 64 months, Fed's actual inflation has remained more than Fed's target of inflation. One of the reasons is expanded federal balance sheet after COVID crisis. They have now appointed a committee which includes Dr. Raghuram Rajan to look at how they can manage federal reserve balance sheet. Because of the credibility-related doubts, U.S. interest rates have started inching up. The U.S. 30-year bond today is trading at a level which was last seen in 2007. The U.S. 10-year yield has also spiked post-last federal policy meeting. While interest rates in U.S. is rising, it is failing to support currency dollar, which normally should strengthen when U.S. interest rates are going higher. As more money flows into America, this time is showing different behavior. One of the reasons why dollar has weakened is American government balance sheet. They are earning roughly around $5.6 trillion and they are spending roughly about $7.5 trillion. Interest alone constitutes about $1 trillion. Net-net earning 5.6, giving away or spending roughly 7.4, the deficit keeps on increasing. That deficit needs to be funded. That's happening via the debt market. And U.S. debt has now touched about $39 trillion. Outstandingly, dollar index has kept on falling vis-a-vis peer group. It's now trading below $100. The savior for U.S. economy is consumption. Americans have become richer without saving. As their equity market has done well, U.S. now constitutes more than 70% of global market cap. This rally in stock market has created household net worth, which in turn is supporting consumption. As consumption remains strong and tariff kind of restricts some of the imports, local manufacturing in U.S. is doing well. And the PMI has risen to 4-year high in the month of July. This is also reflected into stock market, where top 10 firms are now about 43% of S&P 500 market cap. This is highest in many decades. There is sharp polarization where big is becoming bigger and small is remaining small. Market cap to GDP ratio. U.S. has exceeded 200%. This partly explains why Warren Buffet is sitting on so much of cash. Normally, he would have used this benchmark indicator market cap to GDP ratio for determining whether markets are in a bull phase or a bear phase, whether markets are expensive or markets are cheaper. German market cap to GDP ratio is 50. UK is around 100. Japan is about 175%. And U.S. is right at the top at 200%. From a valuation point of view, today, U.S. stocks looks on the higher side of valuation, both on an inflation-adjusted valuation, as well as on a nominal valuation. Many a times, markets can be driven by sentiment. We have seen SpaceX IPO coming with a roaring success. It went up about 20% post-listing. And now, as the euphoria has waned, the SpaceX, mighty SpaceX, is trading well below its issue price. Coming to Indian economy, headlines by and large has remained stable. Whatever one says, opposite is also true for India. But this is an interesting data I found out. We all associate Dubai with fantastic growth. In last three decades, Dubai GDP has grown by 8.5x. They have attracted citizens from across the world, including India, by offering quality of lifestyle. Their spending has resulted into Dubai economy growing 8.5x in the last 30 years. India, on the other hand, represents a chaotic street. And yet, their GDP has grown 10.4x, much more than Dubai's or UAE's GDP. Partly, this is attributable to rapid infrastructure, which India has built. This is a fantastic chart, prepared by metrics. I have just copied it from them. And it shows the kind of infrastructure, which was built in last 12 years. Undoubtedly, this infrastructure buildup is resulting into higher growth. India now is 8th largest exporter of goods and services. Hopefully, in the near future, we'll overtake Netherlands, Singapore, United Kingdom to become top 5 exporters worldwide. If we look at our macro, it looks perfect in the past. Our ranking in terms of emerging market composite score has moved back to the top. Our challenge was monsoon. In June, there was 40% deficit. July is almost normal and that has resulted into overall deficiency coming down to 13%. Last year, we started with surplus, went into deficit and moved back to surplus. This year, we started with a large deficit and slowly, slowly have recouped it in the month of July. water reservoir levels are around historical averages. It is better than what it was there in 2023, which was last El Nino year. While market is expecting a super El Nino and August and September rains will be impacted, there is a glimmer of hope, where we have seen positive IOD developing in Indian Ocean and in Bay of Bengal. Let's hope and pray the IOD helps us negate El Nino, super El Nino effect and August and September rains don't go substantially below long-term average. For us, while agriculture contributes under 15% of GDP, it is employing a substantially large portion of manpower and whenever monsoon deficit is below 10%, the impact on agriculture GDP, rural economy is substantially negative. While monsoon side, there is worry, there are lots of positive news around deep technology. India developed its first indigenous expandable turbojet engine of 350 kg power. It also ran world's first hydrogen train from Jind to Panipat. A startup in Bangalore created world's first rare earth free aka magnet free electric motor. Tata's produced C-295 military aircraft and Space Route send India's first private orbital rocket. These are all the developments in last 30 or 60 days which gives confidence that India is finally catching up on deep technology. This is also reflected into manufacturing Apple's iPhone created electronic manufacturing momentum. Defense support from the government created indigenization as well as export opportunities. Slowly and steadily Indian manufacturing is coming into play. Defense exports have jumped significantly to 38,000 crore. Auto retail sales have continued positive momentum in last year as well as last month. To support need credit growth of a growing economy, banks have maintained reasonably good deposit as well less credit growth. Private investments have slowly and steadily started picking up services exports while they are seeing adverse impact from IT services. They are seeing positive tailwind from global capability centers. overall service exports should touch roughly about $400 billion last year. Of course there is also services import but still India enjoys $200 billion plus surplus on services. GCC is expanding in terms of quantity as well as creating high paying jobs. courtesy services export our external vulnerability has come down. Oil intensity of Indian economy is down significantly over last two decades. The terms of trade is now moving in our favor. As we continue to push renewable energy our need to import oil will keep on secularly declining. While services have done well our trade deficit continues to remain high. We have covered on the oil side but imports from China has grown significantly. This has impacted rupee. It is almost trading near all time low level. Partly rupee weakness is also function of RBI's short forward position at last published number RBI was more than $100 billion short in forward market. Keeping that short position in mind government and RBI announced several steps to tap flows. External commercial borrowing norms were liberalized. FCNRB scheme was launched where $40 billion has been mobilized. Debt FBIs were given tax exemption which has also resulted into flow. Our expectation is that roughly about $100 billion could come from June 26 to December 26 thanks to all these efforts that should cover forward position of RBI and that should give some respectability to rupee. In that mixed background tax collections have started slowing down while corporate tax collections are good income tax personal income tax collection has slowed down to almost decadal low growth rate. This is impacting government's ability to spend. Government spending like income tax collection is now lowest in decade. While the quality of spending continues to remain in favor of capex and investment, the overall deficit will become challenging because of the middle list situation. Combined effect of slower taxation revenue growth is reflected in government's capex. It has started stagnating from 25-26 and expected to stagnate even in 27. Other challenge which Indian economy is facing is credit hungry consumers. Now consumption loan which is not bought for vehicle or home is almost 50% of total outstanding retail loans from 34% of total retail loan in March 17 it has now become almost half whereas secured loans against vehicle against mortgage has come further down. coming to equity market on this mixed background we have seen broad recovery in market post US Iran conflict pharma defense media capital market have done well bank oil and gas FMCG has continued to fare poor over India's market cap to GDP ratio remains above 100% but it has leaped in F527 below its F525 or F524 number the biggest jump post crisis has happened in small and mid cap small caps are up about 15% from pre crisis level mid caps are up about 7% large caps is 4% lower than February level India has underperformed its peer group in the MSCI Korea Brazil Mexico Taiwan have delivered better return India has delivered on a one-year basis negative return driven by currency as well as stock market this pushed FBIs to sell throughout March April May June July month they ended up turning buyers FPI selling was largely in banking and IT stocks in CY 25 they sold about 8 billion dollar of IT stocks in CY CY 26 year to date January to July they have sold about 3 trillion dollar in IT and 12 trillion dollar in financial services if we take last 10 if we take last 10 years and please read this number August 16 to July 26 the FII investment has become almost nil against that thanks to support from mutual fund distributors DII has pumped 300 billion dollar in Indian equity market the FPI ownership is now at a decadal low we have seen on the basis of nifty versus global indices by and large at this kind of divergence Indian markets bottom out and they start outperforming global market our expectation is that in the second half FPI could be buyers and that should make bottom of the market and create room for the upside while FPI were seller in secondary market primarily in banking and IT stocks they have been regular buyer in primary market there is not even one IPO where we wanted to invest and we didn't compete with the FPI in getting the slot thanks to all of you domestic investors continue to power money into mutual fund SIP has become a household name and all of you have worked so hard in educating investors that this time they have behaved extremely responsibly thanks to all the domestic investors who have supported with so much of confidence and maturity the quarterly results for June 26 quarter has come quite nice by and large misses are half of meat in Nifty 50 13 companies delivered better return than expected only 6 delivered below their expectation in mid cap 18 companies delivered above expectation 12 below expectation in Nifty next 50 17 companies delivered above expectation and only 3 companies delivered below expectation overall corporate earnings and the results are well ahead of street expectation this will be reflected into profit growth for MSCI India index in F526 the growth in earning was about 10 percent now both for F527 and F528 we are likely to see double digit earnings growth all this converted into valuation large caps are trading around its historical average small caps are trading at roughly about 20 percent premium and large mid cap is trading roughly about 10 percent premium the IPO supply pipeline remains very very strong from 17 billion dollar issuances in F523 F526 we saw $60 billion plus issuance F527 is likely to be similar 100 plus IPOs are waiting to hit the market provided investors can absorb at crucial time IPOs can change direction of the market in 2008 Reliance Power IPO made the top of the market in 2003 Marity Udyog IPO made the bottom of the market if you look at market we see limited downside and a reasonable upside this is time to get invested into stock market undoubtedly there will be ups and downs because of geopolitical risk as well as IPO pipeline but at current level one can start getting invested into the market in terms of investment opportunity active fund continues to do their job across majority of our equity funds we have delivered double digit return on a rolling return basis over 3, 5, 7 and 10 year we have also outperformed benchmark indices indices by reasonable margin the same trend continues in other equity and hybrid fund do carry this message to the investors in passive fund you are likely to underperform benchmark indices in active fund if you choose wise fund manager like Kotak you are likely to get more return than benchmark indices on a point to point basis bearing Kotak small cap fund where we have failed to add value to our investors over 3 and 5 year basis majority of our funds have continued to outperform their benchmark indices thereby adding value to the investors this is true on a point to point basis in some of the other equity and hybrid funds similarly on SIP bearing Kotak small cap across almost all our equity funds and hybrid funds we have added value by outperforming benchmark indices Kotak flexi cap continues to remain one of the consistent performers it has about 75% allocation to large and 25% allocation to small and mid cap and cash for consistency with a reasonably less volatility Kotak flexi cap continues to provide a good option multi cap is a harfan maula fund consistently generating better return than benchmark indices this is one of the fund which is must have in your portfolio Kotak multi asset allocation fund brings asset allocation to retail investor for as little as 500 rupee many clients have private bankers here is India's best fund manager acting as your private banker by allocating between debt equity and precious metal coming to debt market US inflation as I mentioned earlier continues to remain above federal reserve target range market market is now pricing in two rate hikes in US Fed rate Mr. Kotak highlighted increase in 10 year and 30 year US yield as you know US yield sets the benchmark for rest of the debt market one impact of rising US interest rate was witnessed in yen yen kept on depreciating significantly from somewhere around 140 level by mid of 2025 to 160 before intervention by US and Japan together the debt FPI invested heavily once they got the tax exemption and June witnessed one of the largest inflow India was expecting to get included into Bloomberg bond indices however they have deferred the decision it's a delay but it's inevitable inflation the inflation has remained well under control despite middle east RBI has revised its inflation expectation downwards now they expect core inflation for this year to be around 4.3% GDP GDP growth has been revised upwards as we have handled middle eastern crisis fairly better the fiscal deficit is likely to be higher than the budgeted number because of the middle east crisis as well as potential implementation of eighth pay commission RBI has managed liquidity nicely they have been conducting repo and reverse repo auction to ensure that liquidity remains well within their comfort zone on the debt side income plus arbitrage fund continues to remain attractive for investors it gets taxed on a concessional rate of 12.5% after 24 months investment the second fund which we have launched is infinity hybrid long short fund that's also a good alternative to debt while this fund is an equity fund it does manage risks through derivatives most of our funds which we have launched move in line with the market markets are up 20% will be very happy if we can deliver 22% return if markets are down 20% will be very happy delivering minus 18% return our returns are invariably linked with the market movement as we are long only fund manager in [00:40:24] Speaker ?: in [00:40:24] Speaker 1: February 25% sebi permitted us to launch long short fund derivative strategy fund we took time to get the talent kalpesh jain joined us couple of months back based on his comfort and confidence we have launched our SIF objective is to deliver positive return year after year irrespective of market movement how do we achieve that magic well some portion will be invested into arbitrage trade and REITs debt will be high quality accrual oriented portfolio and special situation will be in IPO QIP blocks where we take a tactical call in which will be permitted to invest under sebi guideline the heart of the SIF comes from derivative strategy where we play on volatility we play on long short and we try to follow a quantitative strategy to explore relative value trade net net do look at SIF recommend that to your clientele who are looking for a stable return it's an ideal alternative to high tax paying investors who are looking to invest in debt market on gold one of the best day today to talk about gold as gold was up 4% plus gold prices have corrected from $5,500 to about $4,200 as we speak [00:42:09] Speaker ?: gold [00:42:10] Speaker 1: the correction in gold was driven by US interest rates which were expected to go up before the Fed meeting there were some people who were expecting Fed to hike rates consensus now is 2 to 3 rate hikes in US interest rate as US interest rates goes up there is some impact on gold prices our outlook on gold continues to remain positive that's mainly driven by central bank's expectation to be a net buyer of gold China one of the biggest nation having FX reserves in trillions of dollars they have continued to buy gold in April May June and probably July China's buying of gold along with other central banks is the primary reason why we believe gold is something which we should consider as part of our portfolio this is another way of comparing while money supply is kept on inching up gold prices have corrected and hence this is attractive opportunity to invest normally gold have gone up after a period of consolidation and we believe similar patterns should happen in the months to come silver continues to remain a trading bet it did correct by almost 50% from $116 to $57 an ounce we believe it will continue to remain volatile this is the estimated holding of gold across various countries this is our outlook on the sector theme and asset allocation equity we are positive as FPI selling is reducing in intensity and turning into buyer geopolitically US Iran are likely to settle down none of them wants to go to war India monsoon worry to some extent has been tackled but we must pray for good rains in August and September corporate earnings growth has been spectacular in second quarter net stars are aligning for equity market to deliver better return this year than last year of course IPO supply will cap the upside gold will remain bullish because of central bank activity silver we will be trader large cap stocks and fund we are equal weight mid cap overweight and small cap marginally underweight sectorally we are bullish auto healthcare cement banking and financial services infrastructure theme wise consumption healthcare and financial services look appropriate and in our basket of portfolio multi asset allocation multi cap and flexi cap funds are something which you should consider our passive portfolio continues to remain one of the lowest expenses passive portfolio in the industry and as you know tracking error to a great extent is dependent upon how we what kind of expenses we charge our passive portfolio is on capitalization basis large mid small commodity gold silver overseas nasdaq where unfortunately our limit has been exhausted in passive portfolio one can consider low wall index in today's environment and [00:46:43] Speaker ?: to a Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. [00:51:14] Speaker 1: Thank you.