Given the high volatility expected heading into CY23, the investors are faced with high uncertainty in formulating an appropriate investment strategy.
After evaluating the entire situation, we feel the following factors will support our investment thesis for the next 12 months and help in navigating the turbulent waters:
1. There are no signs of a bubble in the Indian equity market. The investors who have seen sharp drawdowns in overvalued themes like new-age business, API based Pharma, IT and speciality chemicals have made peace with their losses and are looking to re-allocate money. Themes like Paper, Defence, PSU banks, Shipping and Railway stocks may have seen sharp upside over the last 2-3 months but no sector is in a “bubble” stage like CY22-end.
2. The earnings growth is likely to stay positive for CY23-25. Even if we grow 10-15% (not our base case), the stock specific opportunities delivering 15-20% (and more)earnings growth will be selective and hence, active investing may overrule passive for a second year in running.
3. Margins may bottom as inflation, rates and USDINR peak sometime during 2023. We expect USD INR to peak at 83-85 in the run up to 2024 elections. We also expect RBI to stop hiking in H1CY23 and stay on put till Fed blinks. It is likely FIIs will front run this to start buying Indian equities aggressively from H2CY23
4. The leverage in Indian markets is substantially lower as compared to 2000 or 2008. The new margin norms introduced by SEBI and the exchanges over the last couple of years have put the leverage under control. The chances of a sustained crash are therefore much less this time. We may keep hearing stories of accounts being blown due to nascent experience in trading but at a market level, nothing feels like 2000/2008.
5. Despite the outperformance, foreign investors have not been enthusiastic about Indian equities in the past couple of years and their ownership of Indian stocks is at a multiyear low. Besides, India’s weight in MSCI EM has seen steady increase. The probability of an accelerated selling is therefore low. In fact, India with strong domestic economy, stable fiscal conditions and stronger financial markets might find themselves in a position to take advantage of flight of capital from the developed and weaker emerging markets (like Brazil, Russia, South Africa etc)
6. The valuations are not cheap though closer to the long term averages (18x). Given the slower growth and higher bond yields, it is likely that Indian markets may witness some PE de-rating and trade below long term averages. That will be a good opportunity to increase exposure to Indian equities and specifically to passive investors.
7. The bull case for Indian equities as of this morning is neutral to bearish with only select opportunities for active investors. The upside from the current levels is limited, given slowing growth momentum and higher rates; whereas a panic bottom could be deep. We feel more time and price correction can help in increasing exposure to equities. SIP (and not lumpsum) format of regularly investing in high conviction ideas may be the ideal way to go in H1CY23
8. There are some pockets of the economy (and market) that are witnessing a sustainable transformation. These pockets offer once in a decade type opportunities. Some examples are Defence production; Biofuels; Real Estate; Manufacturing Modernization; Self-reliance in Intermediates’ Manufacturing; and Modern Retail. These pockets of growth have been well identified and analyzed, therefore, the risks are mostly known and the growth path well illuminated. Key of getting outsized returns from here will be patience and discipline shown by investors.
9. Presently the opportunity cost of holding cash is minimal as liquid funds and short term fixed deposits are offering decent returns. There is no rush to go out and deploy cash in equities and other assets. Those with a genuine demand for a first/second home are looking to deploy gains from the equity market in buying real estate. Even though our scuttlebutt shows early stress in IT-heavy markets like Bangalore and Chennai, other markets like Delhi-NCR, Pune and Many tier-2/3 cities are seeing a RE boom. We expect this trend to continue in H1CY23. The FOMO buying in equities are likely to come in Q3FY24 only.
10. The developed markets may hit the rock bottom sometime in 2023, though a sustained recovery may elude them for a couple of more years at the least. The stronger emerging markets may find favor with the yield hunters in this scenario. Intermittent fall in Indian markets due to global conditions cannot be ruled out but all things equal, we may continue to outperform global indices like CY22 due to the TINA type environment in EMs.