India's macro situation is fairly balanced. The current strength and resilience in the economy can be attributed to three key areas in the external sector – currency stability, comfortable oil prices, and a reasonable level of inflation, said Ashish Naik, Equity Fund Manager, Axis AMC. In an interview with MintGenie, Naik said volatility has been a lesson for new-age investors post the pandemic and 2023 is likely to be no different.
Edited excerpts:
How do you see India's macro situation? What could be the impact of a recession in the West on us?
India’s macro situation needs to be seen in a relative context. Globally, as the world tip-toes around a recessionary downturn, India’s predominantly domestic-centric economy has thus far remained relatively unaffected.
Growth in the economy is driven by a mix of strong domestic consumption and a buoyant services sector. But that does not mean that all is rosy for the economy.
We find the current fundamentals of India a mixed bag. The growth outlook looks potentially good but other parameters of inflation, fiscal deficit and trade/CA still exist.
India’s macroeconomic situation may weaken at higher energy prices; current oil prices provide a fair bit of respite but fresh pressures could exert incremental pressures.
Inflation and commodity prices especially oil are likely to remain key triggers for the markets
External factors continue to remain wildcards for the Indian economy. Flagging global growth has implications for India’s export prospects and domestic manufacturing.
So far, domestic manufacturing growth has thrived to cater to domestic demand and hence has faced limited headwinds from the external market (barring the global supply chain issues).
However, a longer-term success factor for Indian manufacturing might hinge on how well Indian exports grow to cater to global demand.
Oil prices have been volatile since the start of the Russia-Ukraine war. We believe the economy could handle the oil stress up to US$100/barrel.
Higher oil prices could have a cascading effect on economic fundamentals. Thus far, the Indian government has taken several positive steps to insulate the economy from oil price pressures.
The current strength and resilience in the economy in my view can be attributed to three key areas in the external sector – currency stability, comfortable oil prices, and a reasonable level of inflation. All things considered, the macro situation is fairly balanced.
Most variables in terms of rate hikes, recession, etc. are already on the table for the market. As we are at the end of this year, how do you foresee the market trend in 2023?
2022 in hindsight can be seen as the year of market contemplation. Indian markets are likely to end the year almost flat (±5%) barring a possible December move on either end.
Globally markets have reassessed a plethora of global risks. We believe the year ahead will act as a litmus test of India’s resilience.
Corporate India’s balance sheet is stronger than it has ever been over the past decade as much of the deleveraging cycle has played out.
Green shoots in terms of capex and follow-through of earnings have buoyed Indian equity markets to all-time highs.
For rates, we anticipate, markets have already begun pricing in peak levels of policy rates. Policymakers have focused their attention on combating widespread inflation.
With recessionary fears, political upheaval is likely to force central bankers to re-evaluate this stance and balance policy back in favour of growth.
Asset allocation models have been impacted over the last 18 months as both equity and fixed income world over has been on the downturn. As that correlation potentially normalizes in 2023, opportunities are likely to re-emerge.
Volatility has been a lesson for new-age investors post the pandemic, and 2023 is expected to be no different.
Are you worried about the current valuation of the market? What could be the range of Nifty for the next 2-3 months?
While headline NIFTY P/E numbers look elevated at 23 times, this is very close to the 10-year average. This is however strictly not comparable due to a large number of constituent-level changes of the index in favour of high P/E stocks over the last 2 years.
The broader markets paint a different picture. At last count, roughly 40 percent of the BSE 500 companies trade at lower levels as compared to their peak valuations.
Also one must factor in the earnings performance of the market. Despite margin pressures, corporate earnings have been better than expected.
Overall, market revenue and net profit growth came in at 25 percent and 4 percent year-on-year (YoY), respectively, with a margin contraction of 4 percent.
On a net balance, while the headline index may toddle around current levels for the quarter, we could see stock-specific moves. We must also keep a watchful eye on the late return of FPI investors.
If November numbers are used as an indication, FPI favourite stocks could see buying favour leading to outsized price moves V/s the benchmark indices.
The banking sector has been hogging the limelight of late. What is boosting the banking space? Can they sustain the momentum for the next two-three quarters?
The banking sector has re-emerged from the NPA ashes. Most banks, especially private sector banks’ reported quarterly numbers, driven by top-line loan growth and NPA resolutions, which is a positive sign.
The banking sector is ideally positioned in India as a proxy play for India’s cyclical rally. The earnings re-iterate this play. We remain constructive on the sector, albeit selectively.
Analysts say to buy quality stocks on dips in this market. Where do you see opportunities in this market? What sectors are you betting on?
Quality as a style factor has been a laggard this year. Despite strong corporate earnings and recent stock price movement, points to markets have largely discounted this performance.
The resulting valuations have made these companies potentially attractive.
The emergence of ‘Quality at a Discount’ as a theme has now emerged in certain pockets.
We are constructive on domestic consumption stories, and select names in the healthcare and defence space apart from banking and finance which I eluded to earlier. The story however is stock-specific rather than sector-specific.
What are your expectations from the upcoming Budget? What should the government do to boost the economy?
2024 is an election year. To that effect, this is probably the last year before elections where the focus could remain on the development agenda.
The government could look to bolster the existing narrative by further incentivizing key flagship projects across the country while providing relief to sectors that continue to struggle amidst global headwinds.
The government is in active engagements with various countries for FTA’s and other trade/economic related agreements.
Policy action in this regard could also be seen in the upcoming budget depending on the fruition of those talks.
Disclaimer: The views and recommendations given in this interview are those of the analyst. These do not represent the views of MintGenie.
