The peaking of interest rates, bottoming out of global growth and easing of geopolitical tensions across the globe are some of the factors to watch out for in 2023, says Trideep Bhattacharya, CIO-Equities, Edelweiss MF. In an interview with Ashley Coutinho, he says higher interest rates could lead to higher cost of capital, shift in investor preference towards fixed-income and lower consumer spending. Edited excerpts:
What are the key triggers to watch out for Indian equities in the year ahead?
The peaking of interest rates, bottoming out of global growth and easing of geopolitical tensions across the globe are some of the factors to watch out for.
In the first three to six months of CY23, we’ll see the economic impact of the interest rate increases done by all major economies of the world over the last 6-9 months.
We will see the impact of the same with regards to the growth rates of the companies and the growth rates of the economy. Once we tide through that somewhere around the second quarter of the calendar year, I think broadly global economies will probably bottom out and look to an economic rebound in the second half of 2023.
How will high interest rates impact equities as an asset class?
In the short-term, we expect higher interest rates could lead to higher cost of capital, thus increasing borrowing costs for corporates, shift in investor preference towards other asset classes like fixed-income and lower consumer spending due to higher cost of borrowings for consumers. However, we expect inflation to be sticky over the medium-term. So, we view equities as one of the favourable asset class to invest in, as equities are one of the best inflation hedges over the medium-term.
Indian equities seem to be richly valued at this point. What is your take on valuations?
We find valuations of Indian equity markets broadly in line with their historical range but meaningfully expensive relative to global markets. Hence, we would expect the relative valuations to re-align in the near-term.
However, we believe India is a bottom-up stock-pickers market. In this context, as bottom-up stock-pickers, we are finding pockets of value in the areas of financials, capital goods and indirect-plays on real-estate. We think, a carefully selected portfolio of such stocks can create meaningful wealth-creation over the medium-term.
What is your take on mid- and smallcap stocks at this juncture?
We are constructive on mid and small-cap stocks over the medium-term. However, the valuation differential that existed between large and mid/small cap stocks has normalised over last 12-18 months. Going forward, we believe, the movements will likely be stock-specific and will follow the earnings upgrade/downgrade cycle of stocks closely.
Which sectors are you betting on?
We are constructive on Indian equities from the five years point of view and bullish on a few themes which are centered around Indian growth story. We are quite positive on private sector investment demand. After a gap of 10-12 years, we are witnessing private sector gearing up for some capex over the next 12 to 18 months, so we are overweight on industrials and capital goods.
The second area that we are overweight on is the financials and lending sector in particular.
They have seen a lot of pain in the last few years like asset quality issues and the corporate deleveraging cycle, and we think that there are good times ahead for lending financials. The third area wherein we would be positive is real estate, wherein we are in the first 3-5 year of a seven year real-estate upturn.
So, in this context, we are bullish on the pure real estate sector, but also on indirect plays like building materials. The fourth theme is what we call idiosyncratic country specific themes like indigenisation of defence and government growth scheme beneficiaries.
What are your key takeaways from Q3 results?
We would summarise Q3 results season to be two-faced in nature, a step forward for industrials, infrastructure and capital goods and a step-back for consumption oriented stocks.
While beneficiaries of India capex theme manifested itself in meaningful beats from companies exposed to this theme, we saw broad-based weakness in consumption oriented stocks, particularly, the stocks that are exposed to lower income and rural segment of the economy. We would expect a similar trend to continue going forward in near-term.
Recently a corporate stock has fallen, which had impacted passive index funds and ETFs. It is believed that this has indirectly benefited active funds. Your thoughts…
We think such events exemplify the need for active fund management with particular focus on corporate governance, understanding company specific drivers and being choosy about stocks to invest as compared to taking a passive approach. With meaningful wealth erosion of investors so far, we view this as a $100 bn and counting lesson for investors that active fund management works, particularly in emerging markets.
