The year 2022 ended with low single-digit gains for the domestic equity benchmarks the Sensex and the Nifty.
Sensex climbed 4.44 percent while the Nifty50 ended the year with a gain of 4.33 percent. Mid and smallcaps underperformed. While the Nifty Midcap 100 index moved up by 3.50 percent, the Nifty Smallcap 100 index suffered a substantial loss of about 14 percent.
Other than the Smallcap 100 index, Media (down 10.22 percent), Realty (down 10.81 percent), Pharma (down 11.43 percent) and IT (down 26.04 percent) also ended in the red.
While the IT index ended as the top sectoral laggard, the Nifty PSU Bank index hogged the limelight. With a gain of almost 71 percent, the index remained at the top among sectoral peers. The Metal index also clocked a healthy gain of 22 percent.
Nifty Bank and Private Bank indices rose 21 percent each. Nifty FMCG and Auto indices rose 18 percent and 15 percent respectively.
The year was challenging for retail investors as multiple headwinds kept them nervous about their investments in riskier equities.
After the beginning of the Ukraine war on February 24, 2022, the world witnessed a sharp rise in inflation which triggered a series of aggressive rate hikes. At this juncture, the risk of inflation still persists and rate hikes have raised concerns about a recession in the West.
The road ahead is not free from challenges.
Many analysts and brokerage firms expect the first half of the new year to be the same as the year 2022 due to persisting concerns.
Moreover, Union Budget, central banks' monetary stance, macroeconomic trends, quarterly earnings, market valuation, inflation, geopolitical factors, commodity prices, state elections etc. will be the top triggers for the market in 2023.
Dhiraj Relli, MD & CEO of HDFC Securities pointed out that the emerging markets may benefit from a relatively more benign world versus 2022. However, India’s trailing outperformance could take a breather in the first half of 2023, given relative valuations.
Nevertheless, Relli believes India will have better growth than most parts of emerging markets due to a relatively strong macro environment.
"A range of policy reforms implemented over recent years set the base, while further policy action has empowered people and boosted financial savings, directing flows into equities," said Relli.
However, from the second half, things may improve since by then inflation is expected to come down significantly and the rate hike cycle will stop. With economic growth, the market will offer new opportunities to investors.
Several analysts suggested their favourite sectors for the new year. They believe those sectors are in a sweet spot and retail investors should bet on quality stocks from those sectors. Let's take a look:
Analyst: Siddhartha Khemka, Head of Retail Research at Motilal Oswal Financial Services
Three themes that are likely to play out in 2023 are CAPEX, credit growth and manufacturing.
A strong revival in economic activity has led to credit growth touching a decadal high of more than 15 percent in the last few months.
While retail and MSME have so far driven the credit growth, corporate credit too is bouncing from the decadal bottom and is expected to gather pace with pick up in private CAPEX.
The cyclical upturn in many sectors (real estate, auto, banking, telecom, etc.), is expected to fuel fresh private CAPEX.
On the other hand, CAPEX by the central government is expected to gather pace in 2023 ahead of the general elections in 2024.
The analyst said the residential real estate sector is poised for an upcycle, primarily buoyed by improved affordability.
As with CAPEX and credit growth, manufacturing is another theme likely to play out in 2023, said the analyst.
"Industry consolidation has led capacity utilization to recover to LTA (long-term average) of 75 percent which would push private investment. The rising scope of outsourcing on account of China+1 and Europe+1, along with various government initiatives like Atmanirbhar Bharat, Make in India will propel manufacturing contribution to GDP higher from the current 15 percent," said the analyst.
Analyst: Manish Chowdhury, Head of Research, Stoxbox
Banking: With a rising interest rate scenario and strong demand for loans due to a revival in the economy, the banking sector is likely to benefit from expanding margins as it passes on rate hikes through the floating rate loans while simultaneously delaying the rate hikes for deposits.
Retail-funded balance sheets, improved asset quality, benign credit costs, and a higher share of repo-linked loans place the banking sector in a sweet spot to further enhance its profitability.
Capital goods: With the private balance sheet looking better, input cost pressures waning, corporate sales remaining buoyant and easy availability of financial resources, we expect the contribution of private CAPEX to improve going forward which was earlier led by more public-intensive projects.
Moreover, capital goods companies would benefit as the manufacturing theme plays out in India due to the government’s PLI schemes and policies, various domestic initiatives (Gati Shakti, NIP, and NMP), global players’ preference for the China+1 strategy, and now Europe+1 on the back of rising energy costs and supply chain hurdles.
FMCG: The FMCG sector would perform in 2023 as a large part of the outperformance would come from margin expansion due to easing inflationary pressures.
The volume growth is likely to come back as the FMCG companies are not expected to resort to aggressive price hikes going forward.
“Higher disposable incomes leading to a shift to branded products, a large opportunity to increase penetration in key categories in rural India and the emergence of new sales channels such as e-commerce/quick commerce/D2C would provide further tailwinds to the sector,” said the analyst.
Analyst: Apurva Sheth, Head of Market Perspectives & Research, Samco Securities
Banking: Banks will continue to remain favourites even going into the calendar year 2023. The best asset quality in a decade, significant improvement in capital ratios, robust credit demand, and improving quality of customers have aided the first leg of re-rating.
The next leg of re-rating will be driven by the continued improvement in its quarterly performance and enhancing profitability.
IT: Although a deep recession in Europe and USA remains a key risk, the analyst believes too much pessimism has been priced in the sector.
Revenue growth in USD is expected to remain in double digits. The sector would also witness a margin improvement as attrition has peaked.
"The sector provides comfortable valuations with low levels of downside risk and any little positive news could bring the optimism back. We remain structurally positive on IT," said the analyst.
Capital goods: India is on the verge of a new CAPEX cycle driven by increased government expenditure.
Government policies like Gati Shakti, the National Infrastructure Pipeline (NIP), and higher capacity utilization of private companies have led to a surge in order inflows for capital goods companies.
The 'China plus one' strategy has also led to increased investments in India.
Analyst: Deepak Jasani, Head of Retail Research, HDFC Securities
BFSI: BFSI enjoys tailwinds like rising credit demand, stable net interest margins (NIMs) and gradually improving asset quality.
Industrials: Industrials can benefit from public CAPEX which has been robust and private CAPEX which could take off soon.
Automobiles: Automobiles can benefit due to large order backlog, easing of supply bottlenecks and expected improvement in rural incomes.
"Defence and renewables stocks could also bounce up faster than others given the visibility of revenue and margin growth in these two," said the analyst.
Analyst: Abhishek Jadon, smallcase manager & VP, Windmill Capital
Infra: A strong impetus from government policies is one of the main growth drivers for the infrastructure industry in India, coupled with a strong CAPEX environment.
Banking: Strong credit off-take in tandem with rapid asset quality improvement is a deal maker for the sector. Deposit rates have also been healthy for major private players. It is expected that the banking sector will continue to ride on the tailwind of asset quality, fewer provisions, and strong credit offtake.
Defence: India’s military spending is the third largest in the world with the FY23 budget pegging it at nearly $54 billion.
“Until five years ago, we were largely importing our defence needs. However, things have begun to turn around. The government’s focus has shifted towards indigenisation, wherein domestic players are not only servicing domestic orders but also exporting overseas, which explains the surge in exports,” said the analyst.
Analyst: Antu Thomas of Geojit Financial Services
FMCG and retail: Festive demand, more promotions, a normal monsoon, and a pick-up in rural demand, along with an expanding distribution network, will aid volume growth.
Power: The average thermal power plant load factor is expected to be above 60 percent and the power demand is likely to grow by 8 percent for FY23.
Pharma: New launches, a strong pipeline, increased R&D and a superior product portfolio are expected to aid earnings going forward.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of MintGenie.