Satish Menon, Executive Director at Geojit Financial Services, has a cautious view for 2023, as he says the actual performance of the market has been weaker and more volatile than anticipated.
In an interview with MintGenie, he said that 2023 will be the year of value buying and a stock picker’s market. He expects the second half of the year to be better than the first half and advised investors to have a balanced portfolio of equity and debt. The mix in equity can be in a range of 50 to 65 percent based on the appetite, he suggested.
Do you expect 2023 to be a tough year? What will be the key challenges?
Yes, we have been holding a cautious view for 2023, and the actual performance has been weaker and more volatile than anticipated. The key challenges are selling from FIIs, high interest rates, elevated inflation, slowing earnings growth, and premium valuations in India. We feel that most of the issue is being factored in the prices. If cautiousness continues in the short term, we can presume that the worst will be over. We expect H2CY23 to be better than H1.
The Indian market has been underperforming EM peers lately. Do you see this trend continuing?
Yes, this trend can continue in the short term, as FIIs have an underweight rating on India due to its premium valuation and slow earnings growth, while other EMs are experiencing the opposite.
Which sectors would you advise investors to stay away from amid this volatile environment?
Sectors and companies that are heavily reliant on the external economy are expected to bear the brunt of the business slowdown. Metals, mining, chemicals, autos, banks, IT, and pharma are some of the sectors highly related to exports. However, within that, some sectors, such as IT, pharma, and chemicals have corrected well in 2022-2023 and can be considered a long-term bet with a focus on value buying.
Foreign investors have turned net sellers again. What are the key reasons behind that? When do you see foreign flows returning?
MSCI-India was trading at more than 50 percent premium to other EMs, which is expected to narrow in the short to medium term. Other EM earnings growth is expected to improve as a result of the end of the zero-tolerance policy, while India is expected to experience an economic slowdown due to a drop in external demand and high inflation. We can expect a reversal in the trend and interest policy changes from ‘aggressive’ to ‘neutral’ in H2CY23.
In this rate hike cycle, how, according to you, a portfolio should be positioned? More on debt or higher equity exposure?
In the current scenario, which is approaching the peak of the interest rate hike cycle, it will be better to have a balanced portfolio of equity and debt. In equity, the focus should be on value buying as the broad market continues to trade above the long-term average valuation. And value opportunities are available after the consolidation of the last 4-5 months. Debt can be considered because income from interest rates has become lucrative, and the possibility of capital gains looks high in the medium term as market yields freeze and will moderate in the next 1-3 quarters. The mix in equity can be in a range of 50 to 65 percent based on the appetite.
What about other assets like gold and real estate? How should one allocate these in their portfolio?
Gold is a safe hedge against recession and high inflation, and it is advisable to hold about 5-15 percent of the portfolio, based on risk appetite, on a short to medium-term basis. However, the exposure can be moderated in H2CY23 and H1CY24 based on the trend of the equity market. We anticipate a reversal in view. Regarding the real-estate sector, we have a cautious view in the short to medium term due to the high housing loan rate and rise in the cost of houses in the last two years. However, the proportion of investment in real estate depends on the appetite of the HNI. For a retail investor, interest income has become better compared to the average rental yield of 3 to 3.5 percent.
One key piece of advice for new investors?
2023 will be the year of value buying and a stock picker’s market. You cannot make money by buying any stock as it was in 2020 – 2021. New investors need to conduct a background check on the stocks they own. At the same time, I would like to state that 2023 is a good period to identify stocks with a long-haul horizon and start investing in a SIP type of accumulation for long-term wealth.
What themes should one bet on in 2023?
FMCG & infra are two promising sectors as we anticipate improvement in the rural market and capital expenditure. Domestic economy-oriented businesses are likely to do better. Export-wise, IT, pharma and chemicals have a strong long-term outlook, but recently they have been under pressure of high valuations, a slowdown in business, and recession risk. They should be considered for accumulation in 2023. New-generation stocks have collapsed in the last one year, generating a high-risk call to capitalise on a short to medium-term basis.
What is your view on the banking index which has underperformed this year after a stellar 2022? Do you see a reversal soon?
Currently, we have a neutral view as valuation gaps have narrowed and further credit growth is expected to slow down. Slow deposit growth and high interest costs will shrink the system's liquidity, forcing banks to become more aggressive in garnering funds and putting pressure on margins. We have a stock-to-stock approach with a positive bias towards private banks.
Do you see a buying opportunity in the auto, IT space?
On autos, we have a mixed view; we are positive on commercial vehicles while neutral on 4- & 2-wheelers. The 2-wheeler segment is under high competition due to disruptive EVs and a slowdown in the rural market. The cost of 4-wheelers is expected to rise due to the upgraded norms in BS-6 phase 2 and the mandatory six airbags. Softening commodity prices can be used to counter such impacts; however, demand is expected to slow down as pent-up demand normalizes. The higher capex in the 2023 budget and manufacturing reforms are positive for commercial vehicles, sustaining demand. On IT, we have a positive view on a long-term basis; however, in the short-to-medium term, the view is mixed as valuations continue to trade above the long-term average. We have a stock-to-stock approach and suggest an accumulation strategy.