Inflation, interest rate trajectory, global slowdown, currency and commodity prices are key factors to watch out for in 2023, says Jinesh Gopani, head of equities at Axis Mutual Fund. In an interview with Ashley Coutinho, he says domestic flows are expected to remain resilient, while FPI flows may improve amid a weaker US dollar. Edited excerpts:
What are the key triggers to watch out for with regard to Indian equities in the year ahead?
Themes that the markets will look out for are rural recovery, private capex, sustainability of credit growth, global slowdown impacts, rates and inflation. Domestic flows are expected to remain resilient, while FPI flows may improve amid a weaker dollar.
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There is domestic liquidity, which can to some extent cushion us in future selloffs by foreign investors.
Are there any concerns from a global perspective?
Globally, an ongoing economic slowdown seems inevitable given the current market conditions, but fears of a deep recession may prove unfounded, at least in some countries. With unemployment so low, consumers are better able to weather higher costs. Government action to provide support on energy bills also cushions that impact. Central banks are in a tightening zone. The cumulative increases of 200-300 bps in policy rates now imply real positive rates, with policy rates higher than projected inflation. In such a situation it is likely that inflation stops rising and, over time, begins to decline. While it is wrong to assume an imminent end to inflation, it is reasonable to expect inflation to return to target in the short term.
Indian equities seem to be richly valued at this point. What is your take on valuations?
Valuations are quite rich for the market from an overall standpoint. However, macroeconomic stability, relatively resilient EPS growth and a conducive flow environment justify India’s premium valuations.
That said, select pockets of the market, especially the ones over-owned by retail and domestic funds, have begun to show signs of froth. Further, the valuation premia offered to select companies where growth is lacking is increasingly unjustifiable, especially as base effects wean away supernormal growth. The last month’s move is characteristic of a narrow market, with four stocks accounting for about 45% of the entire market rally. We had last seen this phenomenon in 2019.
What is your take on mid- and small-cap stocks at this juncture?
If we scratch the surface and look at the details of how the market has done last year, this doesn’t look like a traditional upmarket environment. Large caps outperformed mid/small caps and the rupee depreciated, although much less than its emerging market peers. We believe that India is an attractive market and, with stable macro FPI flows, will revive, and this will have a positive impact on high-quality large-cap stocks.
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Which sectors will thrive or benefit from the global slowdown?
Domestic stories are our prime focus currently. The credit growth story remains strong for India with loan growth for PSU banks at 15% and that for private banks at 20%-plus. Our consensus is positive on banks more than on NBFCs, on concerns over rising deposit and liability cost. We will be cautious on IT and materials.
What is your take on earnings growth for India Inc in the December quarter and CY23, given the global slowdown? Could you elaborate?
The ROE (return on equity) outlook for India is consistent with the 10-year average but earnings expectations for FY23E have started to see downward revisions since the second half of CY22, reversing a trend of upgrades (October 2020-December 2021) and flattish revisions (January 2022-June 2022) seen since H2FY21. Consequently, the FY23E EPS is down 4% in H2CY22, while the FY24E EPS has also seen marginal declines. The Nifty EPS grew at about 12% CAGR over FY15-23E. There are risks on the downside, given the consensus Nifty EPS is well above the recent across-cycle growth.
How are you managing the volatility in your funds?
Markets have had a wild ride last year, which tested the patience of investors.
Our portfolios favour large-caps where companies continue to deliver on growth metrics. Corporate earnings of our portfolio companies continue to give us confidence in their strength. From a risk perspective, in the current context, given rising uncertainties, our attempt remains to minimise betas in our portfolios. The markets have kept ‘quality’ away from the limelight for over 18 months, making valuations of these companies relatively cheap, both from a historical context and a relative market context.