Greetings from Team Carnelian!!!

Wishing you and your family a Happy Diwali and Prosperous New Year.

Whenever there is a flow of negative events, it is very natural for investors to get anxious and paranoid. Investors start oscillating between “protecting capital”
(risk) and “capitalising on opportunities” (returns), resulting into varied outcomes for different investors. The key reason for these varied outcomes lies in how o

ne navigates through/balances

between risk and opportunities.

Every month, it has been our constant effort to educate investors to enable them to make better/informed decisions – this month we are focusing on the current fear
factors which are top of the mind recall for every investor today, viz:

1. US economic macros and impending recession

2. Ongoing geopolitical conflict

Today, most investors agree that India is a great long-term story, but can it remain unscathed from these ongoing global issues and their outcomes? Instead
of engulfing in fear, let’s assess the “underlying risks” – it’s source and impact.

And let us assess the impact on two counts:

• Liquidity – impact on money supply & flows.

• Economic – impact on underlying growth, specific sectors, etc.

US economic macros and impending recession:

After a gap of ~15 years, the US 10 year and 30-year yields, have both hit the 5% mark last month! Despite the steepest rise in the interest rates in the last 40
years, inflation has continued to be sticky. Unlike the past, the US economy today has very limited resources to deal with the multiple challenges springing – highest ever Debt to GDP since 1940,
reluctance of emerging markets (EM) to fund the US treasury, record high interest rates, unabated inflation, securing USD hegemony etc…

For the first time in the last 80 years, US Fed is facing a challenge like what EM central banks face. If it increases the rates further, the largest economy runs
the risk of unintended consequences – potential systemic crisis, entering recession? If it starts slashing the rates too early, inflation will remain high. Thus, there is a high probability that
the US Fed will keep the rates at current levels for long (3-4 quarters) and try to ensure no systemic crisis like SVB unfolds.

All these factors indicate a high probability of a mild recession creating jitters in the global & EM markets.

When there is high probability of the world’s largest economy landing into a recession, it is important to understand the economic and liquidity impact of the same
on Indian economy.

Liquidity Impact:

The first impact of any crisis is always on the flow of money, which in turn impacts the asset prices. When Global Financial Crisis (GFC) hit in 2008, the entire EM
including India suffered massively on account of huge over dependence on the US for money supply. However, this time the situation is different – let’s
understand how.

Healthier Balance Sheets with low overseas exposure

International exposure of banks & corporate this time around is minimal compared to the exposure they had during the GFC.

Prior to 2008, most large Indian corporates had done significant overseas acquisitions borrowing USD, resulting in significant leverage. e.g., Tata’s had acquired
Corus & JLR, Hindalco had acquired Novelis, Suzlon had acquired REPower, and many others. Drying of global funding put pressures on Indian balance sheets. Many corporates’ solvency became
questionable.

This time around it is not the case. There are hardly any global acquisitions Indian corporates have done & India’s corporate balance sheets are far less
leveraged than what was in 2008 crisis.

Also, Indian Banks had a large balance sheet exposure to global markets. When the GFC happened, local corporate banks like ICICI bank and Axis Bank came under huge
stress due to global exposure, leading to a liquidity crisis. This time around international exposure has scaled down significantly.

Also, all four balance sheets – Corporates, Banks, Households and Government are in a much healthier shape vs the crisis of 2008.

*Optically, government debt to GDP looks higher due to the large support provided during the post-covid period – however the same is supported by buoyant tax
collections.

India’s forex reserves have grown from USD 250bn in 2008 to USD 600bn now – India is well placed to handle any potential liquidity stress arising on account of stress in
the US. Impact on Household, Corporate, Government is going to be limited and won’t lead to 2008 kind of crisis.

Now let’s look at the liquidity in the Indian markets.

Historically, we have always seen whenever the US Fed tightens, FPI’s pull money out of India, thereby, creating a bloodbath in the Indian markets. This time around
too, FPIs withdrew ~USD 50bn from India, but despite that the Indian market held well, backed by massive domestic flows from domestic retail investors. SIP flows of USD 2-4 bn has sustained. Today
also, Indian household exposure towards equity as an asset class is still quite low. We believe this is a big difference from
any of the previous crisis.

Now let us think reverse – what will happen when the FPI flows come back, which we believe will happen sooner than later. As soon as
the interest rate environment changes, which could be 3-4 quarters away, massive flows coupled with the ongoing domestic flows can lead to a big re-rating. Today, despite India being one of the
most promising markets globally, it is significantly under-represented in Global portfolios. This time this is different.

Economic Impact: Global shift will lead to India gaining market share in merchandise exports

Historically, whenever the Global economy slowed down, Indian economy also suffered from demand. This time this is
different. Post Covid, India is benefitting from risk diversification emerging as an alternate to China in the global supply chain. MNCs are setting up factories, local
companies are expanding capacities. ABB & Apple have already initiated steps towards making India a global sourcing destination. Apple manufactured and exported products over USD 2.5bn in Q1FY24
from India, > FY23. Aero, defence, consumer electronics, medical devices – all sub-segments of EMS are seeing strong domestic manufacturing inquiries. Defence has seen a large amount of import
displacement with dozens of sizeable private Indian companies having emerged over the last 2-3 years. India’s market share in global merchandise exports stands minuscule at ~1.7-1.8%. There is a
long runway for India to gain market share. Even if the global economy slows down, global shift from China to India will keep exports resilient for India. Hence the economic
impact of global slowdown on India will be negligible if any.

Capacity expansion happening across Industries

Utilisation across core industries has inched up, driving the need for newer capacities. To top it, The Government of India has played a great role by embarking upon
the AatmaNirbhar Bharat program (PLI incentives, BIS, etc). Driven by power deficits over the last 6 months, thermal power capex is expected to pick up sharply over the next 2-3 years. Capex
announcements across corporates has jumped substantially by 35-40% YoY.

Massive increase in Infra spend

Transport infra including high-speed rail corridors, metro, flyover, bridges have picked up substantially across the country. Bank funded projects have gone up from
an average of INR 1.5-1.7tn over FY17-20 to INR to INR 2.6tn in FY23. The same is visible in the order book of infra and cap goods companies. Order booking for L&T doubled during 1HFY24 to
INR.1.25 lac cr. For product-based cap goods companies as well, order flows have swelled up by ~30-60% on a YoY basis. Clearly, capex across industries and segments has picked up sharply across
India which will drive the overall economic cycle.

Thus, we believe the economic impact on India will be very limited.

Geo-Political conflict:

The second big source of worry for most investors is the ongoing Geopolitical tensions. First in Ukraine and now in Israel. It is very clear from the geopolitical
environment that the underpinning of all these is fight for supremacy between US and China. This is unlikely to end in a hurry. We think when two major economies fight for supremacy, military
conflicts are given and they are always played indirectly just like in the game of chess, using different pawns.

While no one can precisely predict, what’s likely to happen but let us share our thoughts on this. What’s different
this time on this front as far as India is concerned.

Historically, major impact of any geopolitical conflict is felt in the form of a sharp rise in the energy prices. Fortunately, this time around, thanks to the strong
foreign policy framework & global standing, India has been able to access supply from restricted sources, resulting in a muted impact on fuel prices. In fact, high energy prices in Europe forced
the closure of many industries, creating huge opportunities for Indian companies, where energy prices were under control. This is very different from the
past. Secondly, another positive impact of the ongoing geopolitical conflict is India’s export footprints have increased to many more countries. E.g., in FY23, Netherlands
emerged as the third largest export destination for India which was never the case. India is witnessing a sharp rise in inquiries/ and business with many other nations. Because of G20, India’s
clout in the African continent in going up. Companies like Tejas Networks is tapping the huge telecom equipment market there which until recently was controlled by Huawei and Nokia’s of the world.
Today the Indian government is unapologetically marketing Indian companies & businesses to friendly nations. This time this is different.

We think all these are creating a huge opportunity for the Indian economy and Corporate India. As a result, we feel the impact of the ongoing geopolitical conflict,
economically will be limited or may be positive.

When we look at things in totality, the economic and liquidity impact with the above lenses and dig deeper, we feel the market’s current concerns over them is an
opportunity rather than risk. Of course, no one knows the future, and no one can predict the markets in short term and that is neither our attempt. We have just attempted to explain our perspective
on what is different this time and what could be the potential scenario which is contrary to market perception. Long-term capital allocators should see this as a good opportunity to deploy
capital. Happy investing and wealth creation with Carnelian.

Our best wishes to you and family for a great festive season. May you enjoy best of health and wealth in new year.