India has been – and will always appear – expensive because of the premium on democracy and free markets. State-owned enterprises in indices have the lowest weightage compared those in other emerging markets, Aashish Sommaiyaa, executive director and CEO of WhiteOak Capital Asset Management Company, said in an interview with Moneycontrol’s Nickey Mirchandani.
He expects the first half of calendar 2023 to be similar to last year as concerns over the US economy, the collateral damage in Europe on account of the Russia-Ukraine war, and resurgent cases of COVID-19 in China continue to shape sentiment. These factors could lead to some correction in the first half, he said. Edited excerpts:
The Indian markets were the fifth-largest in the world with $3.5 trillion capitalisation in 2022. What’s your assessment now?
Aashish P Sommaiyaa: 2022 was quite a rollercoaster – geopolitics, the concern over the US economy, collateral damage in Europe because of what’s happening in Ukraine, and of late, China. I think multiple things have kind of troubled the markets. Also, there has been quite a strong sector rotation in the markets… While the Nifty has been making new highs, you can clearly see that people’s portfolios are not necessarily making new highs. So, I think that it's been a challenging year…
When you ask me about 2023, I have to say that it is in the early part of 2023… But eventually, maybe somewhere in the first quarter or in the first three to six months, you will see some of these issues come to a head. Maybe we get a leg down, hopefully the market digests it, and then maybe we can bounce forward… but in the near future, or the foreseeable future, or maybe the first half of 2023, I think it's going to be more of the same, unfortunately.
Could you list out a couple of factors that you think would influence the market trend in 2023?
The war in Ukraine… or the challenges related to a slowdown in Europe… How bad is the COVID-related relapse in China? Does it spread to any other part of the world? How fast does the Chinese economy bounce back? And most importantly, as far as the US is concerned, clearly, they're raising rates in an economy, which is actually strengthening. Maybe some early signs of a let-up as far as the real estate sector is concerned. If you see the stock markets, obviously, stock markets are correlated to the external world. And for much of 2022, we have been correlating or dancing to the tunes of the external world. It's just that our local conditions are good. So maybe we outperformed or when we had a correction, probably we bounced back. But I think that till we have clarity on where the US economy is going and when their monetary policy effectively changes stance… we will see this kind of yo-yoing… And we will see that every time the market outside makes a dive, we also will correct in correlation to those markets.
The markets have staged some resilience, especially the mid-cap index. What are your Nifty targets?
So, a couple of things to keep in mind… you know that the new highs for the Nifty actually came with poor performance in the global market. And more importantly, it came around with a significant sector rotation in the markets, right? The other important thing is as a result of what is happening in China and the US, there have been severe headwinds for IT as a sector, whereas in India, fundamentals of IT companies, especially midcap IT companies, have only strengthened, they've not actually deteriorated.
… we had $20 billion FII selling – our data says that about $10 billion of the FII selling was in financial services, and $9 billion was in IT services… A good part of the FII selling in India was only because India is part of global emerging markets. But it was not really directed necessarily exclusively at selling India as a market, right? So I think these are some trends, partly technical, that have caused a correction.
Yes, there was resilience in domestic flows throughout the year, but as we exit 2022, I can tell you that the retail mutual fund industry or the equity mutual fund industry is actually seeing some amount of let-up as far as confidence is concerned. SIP-related flows are continuing but non-SIP flows have declined quite significantly. And it's been over a year that people have practically made no returns. So when people make no returns, their confidence kind of starts to flag down.
That is why I said that in the early part of the year, I think we will see more of 2022 reflecting all over again, maybe some ups and downs, but not much gains to be made. Later… a lot of these issues come to a head, maybe we get some correction, markets digest all these things and the second half of 2023 might be much better. So I think some ballpark in any good year, if you get low double-digits, that's a great number. If we get a correction in the first half of 2023, maybe you can actually make more and I'm just hoping we see through that.
Between large-cap, small-cap and the mid-cap space, which are the pockets of safety for investors?
The market will probably show some kind of sector rotation again. And the stuff which has underperformed for the last year and a half might actually be the safe haven that you were asking me about. And the second thing is that if mid- and small-caps underperform for any major measurable period of time, then I think that in the long trajectory, the mid-cap index is the best-performing index in the whole market...
If one were to think about sectors, and maybe whatever has underperformed in the year, year and a half… non-lending financials, consumer discretionary, mid-cap IT, I think some of those things might actually outperform as compared to what we have seen in 2022. And when you have this kind of moment, when the Nifty goes up, with sector rotation, speculative movement, and underperformance from large parts of the market, then while one expects the Nifty to correct, one also expects the broad market to outperform…
Is there room for an upside in terms of valuations because valuations have clearly driven the market outperformance for calendar 2022?
If you were to make relative comparisons, India has been expensive, and will always look expensive. There is a premium on democracy, there is a premium on free markets, there is a premium because state-owned enterprises in our indices have the lowest weightage compared to other emerging markets. There is a premium because our industrial and economic policies have changed quite significantly. So there are many reasons why we have a premium.
On your question, yes, in the near term, whatever de-rating had to happen in China and other markets, it's already happened. So, in the short term, on a relative valuation basis, you might think that some of those markets would outperform India. But I think that is only temporary. Ultimately, in the long term, we will perform as per our economic and corporate conditions, and that I think one is quite bullish, or quite positive. Whatever concerns that I'm expressing are only related to the fact that everything – all concerns of 2022 are still alive.
Where do you see earning upgrades and downgrades - which sectors?
People have been saying 15-16 percent earnings growth, but you know that would have been possible only if the external macros improved. But the whole year has gone by and the war has not stopped and the global environment hasn't really improved. It's only gotten more complex. So, I would put it this way: there will be downgrades. Even if you look at headline numbers, which were supposed to be 15-16 percent, while there is not a serious amount of downgrades that has started, going forward, there would be downgrades. My sense is that you would get low double-digits instead of 15-16 percent kind of growth numbers.
Now coming to sectors, I would imagine that a lot of the industrials, some of the industrials, but a lot of commodity and those kinds of sectors, those are the ones which are commodity utilities, energy, those are the kind of things which would actually see a good part of the downgrades, that is my understanding. Whereas if you ask me, you know, like I mentioned, mid-cap IT and whatever commentary that I'm hearing, or non-lending financials or consumer discretionary would be the theme for 2023.
