Daily Voice | This CIO is bullish on these 3 sectors in 2023 and has contrarian positive view on metals

Given the current challenging backdrop of an impending global growth slowdown, Union Budget 2023 assumes greater significance for the government, as it is vested with the task of delivering a practical budget striking a fine balance between achieving fiscal consolidation and meeting the usual pre-election budget expectations of announcing populist measures.

With the Monetary policy at the fag end of the tightening path, the baton obviously lies on the fiscal policy to deliver a balanced growth-oriented budget. The government is indeed posed with an onerous task of fiscal consolidation amidst the murky global economic backdrop due to the spectre of recession, with high inflation and sharp rate hikes in advanced countries in the midst of geopolitical issues. Thus, we believe fiscal prudence would be the chosen one over fiscal profligacy and that government will stick to its consolidation in a gradual manner amidst a credible medium-term framework.

While budget in the recent years has become slightly less significant from growth reforms standpoint, as the government continues to initiate and implement structural growth policy reforms outside the purview of Union Budget, we yet believe being a pre-election Budget, Budget would be the focal point and decide the future course for Economy and Markets.

The Union Budget is likely to touch upon the key chords of growth drivers by way of incentivising private investments coupled with thrust on growth sustenance via Capex and infrastructure spend while spurring domestic demand. While the focus on capex and infrastructure is here to stay, we expect higher allocations on the populist heads especially in agriculture and rural development schemes along with measures to alleviate the impact of inflation at the bottom of the pyramid, considering it’s a pre-election budget.

Besides we expect the government will concentrate on improving India’s manufacturing and logistics competitiveness along with bringing in some additional sectors under the ambit of the PLI (production-linked incentive) scheme. Further, incentives for industry oriented towards clean tech and clean energy may draw some attention in the budget.

Overall, we expect the Budget to be a balanced one taking the onus of sustaining the growth momentum by focusing on demand revival by way of spurring investments and consumption through Capital spending & creating employment opportunities.

Do you think the FII flow has become insignificant in the Indian equity markets, considering the inflows by domestic investors including retail?

FII flows have been edgy in CY22 in response to the US Fed’s aggressive rate hikes and unwinding of the monetary stimulus leading to strong USD and consequently have been net sellers to the tune of $39 billion in CY22. However, despite witnessing strong exodus of FII money, Indian markets have yet remained well supported with benchmark Nifty delivering positive 4.3 percent return in CY22, thanks to the strong DII and Retail direct participation.

Going forward, while FII flows may see some volatility in the interim, we believe FII’s will continue to stay invested in Indian markets from a long-term standpoint as India’s long-term growth story appears promising with a plethora of structural reforms being implemented by the government and that India will continue to remain the fastest growing country in the Emerging markets arena which should, in turn, reinforce the FII confidence.

While DII’s and Retail participation have emerged as a key pillar of support for Indian Equity markets, we believe FII flows will still be of paramount importance as over the past two years domestic flows momentum was partly aided by the fact that there were very few alternate investment opportunities available. But now with fixed income markets slated to generate very high single digit returns this year, debt / fixed income products will again become an attractive investment opportunity. Thus, in light of the alternative investment avenues getting again lucrative domestic fund flows might moderate a bit and hence FII flows would re assume greater significance.

Do you think the equity market will end 2023 with healthy double-digit return? Which themes are likely to play a big role in the new year?

Indian markets have staged a strong rebound in the post COVID era, and it clearly stands out when compared to both DM (developed markets) and EM (emerging markets) counterparts. Indian markets strong performance post Covid was aided by strong corporate earnings growth, strong domestic liquidity and dexterous management of the economy by the Government & Central bank.

Nonetheless, the markets have witnessed some correction from October 2021 highs, while earnings growth has been strong. As the markets foray into 2023, we expect equity markets to deliver early double digit returns aided by strong earnings momentum, domestic liquidity (healthy monthly SIP run rate of $1.5 billion) and pick up in CAPEX cycle. Indian market valuations are slightly higher than long term averages and is indeed reflective of the positive structural outlook of India. Nevertheless, we think some caution is warranted as global growth headwinds may weigh on equities as an asset class. Yet, India’s resilient domestic demand makes it an outlier, particularly if rural India stages strong recovery.

Our investment theme is skewed towards domestic economy oriented investment theme as we reckon India’s GDP growth to be strong over the next few years as policy reform measures such as PLI, Insolvency & Bankruptcy code (IBC), GST, Digitization (JAM trinity) would start manifesting in growth numbers and drive the efficiencies in the economy. Besides with Union Budget 2023 slated to catalyse the Infrastructure & Private CAPEX while spurring domestic demand in the pre-election year, we remain positive about domestic oriented sectors such as BFSI, Cement & Infrastructure, while having a contrarian positive view on Metals, which is likely to be a prime beneficiary from China’s reopening post COVID.

Do you advise investors to stay invested in auto space for long-term given impending transition to electric vehicles?

The growth rate of electric vehicles adoption in India is promising. We had crossed the 1 million mark of retail sales of electric vehicles (EVs) last year, posting an exponential growth. How this space evolves going forward is contingent on multiple caveats like price competitiveness, development of charging infrastructure and government’s policy support.

We believe the government is focused towards supporting India’s transition to clean energy and we may see some fresh initiatives or existing initiatives like subsidy being augmented in the Union Budget. From stock selection perspective, there are going to be winners & losers in this transition. The learning curve in the sector is going to be steep with multiple newer technologies at play. Incumbents are being challenged by the new players. Incumbent large OEM’s will have to show agility and adaptability in order to maintain their market leadership. Hence our advice to investors is to remain selective and not take a blanket call on the sector.

Is chemical sector a good bet for long-term? Do you see multibagger opportunities in the space?

The Indian chemical sector has evolved dramatically over the last decade with accelerated investments to capture shift in global supply from China. We have already seen many multibaggers coming out of this space and the structural growth witnessed by chemical companies may just be the tip of the iceberg.

We believe chemical industry has plethora of opportunities as growth is not subject to any one economic parameter and one may find comfort in this space for its diversity in terms of chemistries and end-use industries. Furthermore, chemicals is an energy intensive sector. A prolonged energy crisis and persistent problems in supply chains in Europe can coerce chemical companies in the region to outsource manufacturing. India’s low energy and low labour cost makes it an attractive alternative destination.

The chemical companies in India have aggressive capex plans, be it for backward integration, client/contract centric expansions, or moving further into the value chain/high margin products. We believe this space will continue to evolve and post strong growth in the long term favoured by high entry barriers, import substitution and multi-year export opportunities, and ever rising consumption. Companies with sustained focus on R&D, backed by strong execution capabilities will find it relatively easier to foray into newer chemistries, improve process efficiencies and get global recognition

Most of experts believe it is the time to focus on domestic-oriented companies and avoid export-oriented companies. What are your thoughts on this?

At this juncture, with global growth outlook turning bleaker, it is obvious to see the focus of investors tilting towards domestic economic growth oriented companies Vs the export oriented, as the near term growth visibility for the Indian economy remains significantly better than the global economy. The high frequency growth indicators like Tax Collection, PMI’s, Credit Growth, Toll collection etc. are at multi-year high in India versus significant slowdown in other countries.

Even from a structural perspective, we remain sanguine on the domestic oriented sectors such as BFSI, discretionary consumption (Autos’s, QSR), Infrastructure owing to multitude of factors such as rise in per capita GDP beyond 2,000 USD leading to exponential growth in discretionary consumption, demographic dividend and govt impetus on manufacturing & infrastructure. These factors are reflected in the significant outperformance of sectors like Nifty Bank viz a viz Nifty IT index which is export oriented.

Having said this, as long term investors, we believe uncertain times do present an opportunity to build good quality long term portfolio at reasonable valuations. IT & Pharma both the export-oriented sectors and is likely to provide good investment opportunity in second half of 2023. While the sectors do lack immediate trigger and can remain under performers in the near future, but over medium to long term we expect the performance to even out and thereby even as we remain currently underweight on these sectors, we will increase our exposure gradually in 2023.

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