The coming year is likely to be volatile for both global as well as domestic equities and the outlook for inflation and its impact on monetary policy will continue to drive markets in 2023, according to Pankaj Tibrewal, Senior Executive Vice President - Fund Manager, Kotak Mahindra AMC. In an interview with MintGenie, Tibrewal shares his views on outlook for mid-cap and small-cap space, gold, key themes for medium term and an advice for first-time investors.
Q. What’s the outlook for the equity market over 2023?
Answer: We believe that the year 2023 is likely to be a volatile year for both domestic and global equity markets. We expect a more benign global economic backdrop in 2023 and the outlook for inflation and its impact on monetary policy will continue to drive markets in 2023. There is a good probability that second half of 2023, we probably are past peak inflation and peak US Fed hawkishness, which can bode well for the risk assets. The ongoing Russia-Ukraine war reminds us that geopolitical events are hard to predict. A deep US recession and a lower than expected growth in China are also potential risks that investors may have to contend with.
In the backdrop of global growth challenges, India stands out as an oasis in the desert. India is re-orientating its growth model towards encouraging investments and leveraging exports. There are various research reports suggesting that India can drive a fifth of global growth in the coming decade, in a world which is starved for growth. Indian equity markets are clearly reflecting the optimism on growth and the outperformance over emerging and world markets indices have been stark in CY2022. India today trades at a substantial premium over the MSCI EM Index and above its long-term averages.
At current market valuations, we are suggesting maintaining a neutral allocation to equity and using any correction as an opportunity to enter. We suggest marginal overweight to large cap, and marginal underweight to small and mid caps and disciplined asset allocation across equity, debt, real estate and gold.
Q. What’s the outlook on mid-cap and small-cap space on the backdrop of challenging economic growth, higher interest rates, high inflation and a volatile raw material environment and how are you looking to manage the funds in this space?
Answer: After the strong run-up post Covid, we believe that mid-, small-cap space can see some consolidation and we are recommending this space from at least a three to five years perspective as near-term volatility can’t be ruled out. However, we believe that testing times are great opportunities but it depends if you see the glass as half full or half empty. In the last 20 years, there have been various crises and cycles. If you believe in the company you are investing in, beyond a point, the macro impact is limited. We ask ourselves three questions. The first one is whether the profitability and the cash flow of the company are going to increase or decrease over the next three-four years. The second question is whether the management is reliable & honest and whether they can navigate this volatility in the short term and come out much stronger from a medium to long-term perspective. Time and again, we have seen how strong companies actually become stronger and develop strong root… We have seen the latest one in COVID, how corporate India and many of the companies reduced costs and structurally became more competitive either in the domestic or global markets.
The third one is whether this company will dilute me as a shareholder, which means either the balance sheet or cash flow is in a vulnerable position and they need to raise more equity or debt, hence, you will be diluted as a shareholder. If the answer to these questions is positive, i.e., the company will grow in the next three to four years, cash flows are strong, management is good and your shareholding will not dilute, we don't worry too much about macro and short-term disruptions in the broader market space. Our focus for 2023 would be on bottom-up stock picking and focusing on companies with low leverage, strong balance sheet and cash flows and reasonable valuations.
Q. Gold prices are falling, contrary to expectations. Should this encourage investors to invest in gold or rely more on equities?
Answer: Interestingly, gold’s historical macro relationship has weakened over the past couple of years. Historically, for every 100bp increase in US 10-year real yields, gold would tend to fall sharply. Yet this time around, gold has been far more resilient in relation to a sharp rise in US yields. On the other hand, gold has not rallied despite high inflation, leaving a lot of investors confused. We believe part of this resilience in gold prices can be explained by the fact that long-term investors as well as the official sector have been consistent buyers of gold. Central banks in particular have been net buyers of gold for more than a decade now, amid a broader trend of diversifying dollar-denominated reserves. There are reports suggesting that the total net official sector purchases to the third quarter of 2022 have already exceeded previous full-year highs. We would suggest investors have a small allocation to gold (through Gold ETFs) amidst global uncertainty next year and part of asset allocation.
Q. What are the key themes we are positive about from a medium-term perspective?
Answer: Themes we are positive on from a medium-term perspective are:
a. Real estate and home improvement
b. Big becoming bigger, strong becoming stronger
d. Rural revival.
e. Defence, Railways and Infrastructure
f. Banking and Finance Services.
Q. What advice would you give to first-time investors looking to start their investing journey in the current market?
Answer: The advice to new mutual fund investors would be not to invest in funds looking at the last couple of years of returns. Post the strong rally, one should moderate return expectations going forward. Also, equity markets tend to be volatile in the short to medium term. One might even see a sharp drop in portfolio value and that too suddenly. So only those who are willing to fathom this kind of volatility should invest in markets. At the current juncture, anyone considering fresh investments can stagger their investments through a Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).