PERSONALISED INVESTMENT MANAGERS
It’s time for our annual crystal glass gazing. It’s always good to check our progress and plot the way forward. Like we say every year Analyze, Plan And Execute The Strategy. And just look at what we had said about 2022 in our last year’s expectations
We had 95% of the game analyzed and predicted. Taking a pat on our backs for that. Like we have always said “It is hard to predict anything in general, but pointers... Yes, they help in planning and executing for the foreseen eventuality.”
Year 2022 has been a year of consolidation for equity markets despite decent corporate earnings aligned with the market expectations and hence, currently, Indian equities are fairly valued eliminating the noise from the year 2021.
Growth in the year 2023 will only be driven by further earnings growth with a low probability of rerating. In 2023, Sensex may touch 70,000 level at some point. However, sustainability at this level will be difficult until there is a massive growth in corporate earnings.
"It's very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is, "reversion to the mean" i.e. what goes up must come down, and it's true more often than you can imagine."
John C. Bogle
We may see another year of consolidation. Amidst dynamic geo-political situations, markets will remain volatile, and sentiments could turn negative any time. But at the same time, market may provide an opportunity for lump-sum investment with a 15%-20% correction in between.
In the context of appreciating US Dollar against Indian Rupee & other major currencies, we are still importing inflation through our high oil imports. Until USD/INR settles down, we may see higher inflation level. In such scenario, we expect the Repo rate to reach 6.5% before it stagnates.
Currently, inflation in the US is 7.1% vs the 4.5% FED rate. In this context, FED may pivot when inflation comes below the interest rate. Whether the inflation will come below 2% is really a question mark, but it should at least come down to 4% due to the effect of higher base.
The US FED’s intervention to mitigate the economic fallout due to COVID-19 pandemic led to purchasing a large number of U.S. T-Bills and mortgage-backed securities and the balance sheet size more than doubled, rising from approximately $4 trillion prior to the pandemic to nearly $9 trillion at the beginning of 2022.
In 2022, the FED began unwinding its accommodative stance in response to inflation exceeding its 40 years peak. This meant that QE ended in March and QT started in June. There are Indications that FED may bring down the size of its balance sheet to $7 trillion. The tightening has already started from June 2022 onwards and will continue in 2023 as well. It will impact “equities with high valuation but poor fundamentals” negatively.
India’s GDP has surpassed the pre-covid level and further growth will be a function of capital expenditure from both govt. and private sectors. All the ingredients related to capex revival are in place like deleveraged balance sheets of Indian corporates along with clean balance sheet of banks, Make-in-India initiative, PLI schemes etc. Private sector should come forward and act on this. On demand side - China+1, Govt led infra-CapEx along with domestic consumption will be a tailwind.
Domestic focused industries have started performing well in 2022 and they are expected to continue the SHOW in 2023 as well. Sectors like Finance, Auto, Cement, Capital Goods, Luxury Consumptions are expected to do well in 2023. Negative surprises are expected from IT and pockets of Specialty chemicals due to high valuations along with regulatory issues & price erosion in pharma.
Export oriented growth is dependent on the global economy, but at the same time, Indian exports are growing by gaining market share from China & Europe mainly due to the trend of China +1 & Europe +1 and it should continue in 2023 as well. Further, India’s recent free trade agreements (FTAs) with various countries will further boost Indian exports.
We are of the view that Govt. should continue the support for manufacturing and exports in the upcoming budget. Further, since the general election is near, the government may declare some tax benefit in direct tax due to higher tax collections.
Gold price movement depends on Dollar index and FED rate. The current high interest rate scenario in the US, attracting more investors, resulted in higher demand for US dollar and as a result demand for gold has been muted for some time. But, from an investment perspective, Gold looks attractive. With a lower base, gold has more potential to generate higher return from now onwards. Recovery of gold demand is slightly moving up due to demand from central banks across the globe.
“Basically, all known risks are always discounted by the markets in advance, and the unknown risks are well unknown for everyone.”
Indian equities are fairly valued and there is a low probability of further upside due to rerating. Any negative surprise in corporate earnings from any pocket especially Banks can derate the valuations. Any of the following factors/events can easily drag the market by 15% - 20%.
Expectation of equity return - Since the market has become broad based with earnings growth coming from multiple sectors along with decent rerating of stocks in majority of the segment, further growth from here onwards will be purely driven by earnings without any rerating of valuations. Hence, return expectation from equity should be moderate. The returns will not be as lumpy as in the year 2020-2021.
Expectation from Debt Investment – Year 2023 will be the year of debt investments. Guaranteed cashflow requirement for 15-20 years should be addressed by investing in long-term debt since long term G-Sec yields are now hovering around 7.4% levels and it is expected to trade at the same level and provide an investment opportunity in the year 2023. As a general concept, post-tax return from debt should be in line with the prevailing inflation with a cushion of 50 bps either side (+ /-).
Year 2023 will be the year of DEBT, and it is the best time to address your regular cashflow requirements by investing in long-term debt. If you are nearing your retirement and if there is a need for debt allocation in your portfolio, invest in high-rated debt instruments for guaranteed long-term payouts.
As we keep on emphasizing that it is difficult to time the market, the PATH TO SUSTAINABLE ALPHA RETURN is to remain disciplined with your financial plan and asset allocation and continue your investments in equity systematically through SIP/STP. History shows that the equity market corrects to the extent of 10%-20% every year due to various reasons especially led by negative sentiments. These corrections provide opportunities to invest in lump-sum. Below chart depicts how much of a correction occurred every year historically and such corrections are the best time to invest lump-sums in equities to maximize returns.
Investors must check their financial plan, asset allocation next and only then decide about profit booking, continuation of SIPs etc. Financial advisors are the best one to guide in such scenario.
Most good advisors prepare a sound long term holistic financial plan for you based on your risk profile, define your financial goals along with you… do an asset allocation (with contingency plans built in) with you. They are in the best objective position to help you navigate the markets. Reach out to us at firstname.lastname@example.org to understand how we can help you maximize your investment goals or leave a comment below on your thoughts.