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ETMarkets Smart Talk: Smart money moving towards financials, capital goods and autos: Shiv Gupta

Mumbai, Dec 28, 2022

“We are seeing increasing allocations to financials, capital goods, select autos and some strategic PSUs,” says Shiv Gupta, Founder & CEO of Sanctum Wealth.

In an interview with ETMarkets, Gupta who has over 25 years of experience said: “Given a likely recessionary environment across the globe in early 2023, domestic cyclicals should benefit in the initial part of 2023, as India is faring relatively better on many fronts,” Edited excerpts:

As we enter the last month of December, we are seeing some consolidation at higher levels. What is your view on the market for the year 2023?

Indian equities have been able to side-step the global equity market correction primarily due to better growth prospects relative to the rest of the world, and we expect this to continue in the long term.

Even in the short-term, data from India remains relatively strong. A GDP growth of 6.3% in the quarter ended September 2022 makes India one of the world’s fastest-growing economies.

Similarly, India’s composite PMI in November 2022 came in at 56.7, one of the highest in the world. However, India’s valuations have turned expensive relative to its history as well as to the rest of the world.

Further, corporate earnings in the last quarter (September 2022) were somewhat lower than expectations. Therefore, any earnings disappointments in the coming quarters could trigger downside volatility.

Also, since Indian equities have held steady while global equities have fallen significantly, a reversion to a global risk-on sentiment could see India underperform relative to some more beaten-down markets.

Gold outperformed equities so far in the year 2022 compared to 4% fall seen in the previous year. Do you see the trend to continue in 2023?

We have remained overweight on gold through most of the year, primarily because of geopolitical risks and inflation even as some other factors like USD strength have not been supportive.

For Indian investors, however, INR weakness has helped INR gold which has delivered positive returns on a year-to-date basis.

Even as inflation rolls over, equity market volatility, geopolitical risks, expectations of dollar strength softening, and strong technical momentum suggests gold could continue to do well in 2023 as well. We remain overweight on gold for now.

RBI raises rates by 35 bps in the December meeting. What is the trajectory you see for the year 2023?

The RBI rate hike of 35bps in the December meeting was in line with market expectations. This was also reflected in only a marginal upward movement of bond yields post the policy announcement.

The market had expected the RBI to signal an end to the rate hike cycle, but the policy announcement did not provide such an indication.

The RBI governor highlighted that India’s GDP growth remains resilient and inflation is expected to moderate; but he also highlighted that the battle against inflation is not over. Overall, the commentary was slightly hawkish in our view.

We believe this could be the final rate hike in the current rate hike cycle, and even if there is a hike, it would be marginal.

Which sectors are likely to remain in limelight in the year 2023 and why?

Given a likely recessionary environment across the globe in early 2023, domestic cyclicals should benefit in the initial part of 2023, as India is faring relatively better on many fronts.

Tailwinds like lower commodity prices, improving manufacturing competitiveness, and infrastructure investments should continue to benefit India in 2023.

One of the largest beneficiaries of the ensuing investment and consumption will be the financial sector, which is witnessing decades-high credit growth.

We believe high double-digit credit growth is likely to continue given that we are just getting started after a years-long lull.

We think the non-frontline banks will also continue to deliver as the growth will be higher in those names because of their low earnings base.

Apart from banks, the auto sector also looks good from an earnings perspective as easing production bottlenecks led by waning chip shortages and correction in commodity prices bode well for margin expansion.

One should also keep an eye on the coming budget for announcements on improving ailing rural incomes as this would be the last full budget before the 2024 general elections.

Post this the RBI could remain in a wait-and-watch mode for the rest of 2023 and may hold rates unchanged should the data not suggest otherwise.

A lot of PSU banks are picking traction but is it FOMO that is now playing in the market because most investors as well as institutional had very limited exposure?

The traction in PSU banks was largely due to sector tailwinds and improving earnings and asset quality. Besides, these banks were heavily undervalued compared to their private peers.

Even after the rally, PSU banks trade at a significant discount and therefore, may continue to do well in the interim.

However, factors responsible for the current earnings growth are helping all the banks. The normalization after a bad credit cycle tends to lift earnings across the board.

As this normalization concludes, the focus will again be back on lenders with high ROEs and ROAs, who can grow their books and earnings at a decent pace while not diluting asset quality.

Oil prices have cooled off recently. How will that play out on the earnings of India Inc. as well as markets?

Firstly, as a major oil importing economy, lower oil prices would help India on the macro front. Secondly, not only oil, but all major commodities in the last six months have seen price corrections of ~20% which shall aid in margin expansion and drive earnings growth for various sectors going forward.

Where is smart money moving? Where to find value in this market?

We are seeing increasing allocations to financials, capital goods, select autos and some strategic PSUs.

These themes may continue to be in focus going forward because these sectors are coming out of a lull and have favourable tailwinds to attract flows.

One large sector that has given up a good part of its previous gains is IT. Though a weak currency is favourable for the sector, a huge business headwind of economic slowdown in the western world is affecting near-term growth.

Notwithstanding the short-term pain, we believe that the sector will present value opportunities going forward given that it is in a structurally strong trend of digitization and cloud transformation.

FIIs are back with positive flows in the Indian market in the last one month. Do you see a reversal of flows (more money coming in) in 2023?

After being net sellers for most of the year, FIIs turned net buyers last month and this may continue in 2023. A lot of FII money that comes to India is part of emerging market allocations.

Since China makes up a large part of emerging markets, weakness in Chinese markets has a rub-off effect on Indian FII flows as well. Additionally, a strong dollar has generally led to FII outflows from emerging markets.

We expect dollar strength to wane in 2023. Additionally, China is trading close to all-time low valuations. This could lead to FIIs adding to their emerging market allocations and India could be a beneficiary of that.

However, since India is relatively expensive compared to the rest of the EM, we may get a lower share of allocations of the overall EM flows.

How is India placed compared to global peers in terms of valuation?

India is somewhat expensive compared to most global peers. Emerging markets, particularly China, are close to all time low valuations. Europe too, post the recent correction is trading at valuations lower than historic averages.

And the US, while trading at higher than historic averages despite the correction, is still relatively cheaper than India.

Any 3-5 learnings for retail investors from the year 2022 which they can use in 2023?

In investing, as in many other spheres of human activity, the more things change, the more they stay the same. We have been witnessing many structural changes in Indian capital markets over the past few years including a huge move towards financialization as reflected in strong retail equity participation and flows, a huge growth in private markets, and the rise of new-age asset classes like cryptocurrencies.

However, market movements across the entire investing spectrum particularly in asset classes like cryptocurrencies and early-stage investing have served to reinforce age-old investing principles like profiling, asset allocation, and diversification.

These apply to all investors, retail, high-net-worth, and institutional. We reiterate a few of them here:

1. Investors should ensure that they have properly assessed their investment profiles in terms of risk appetite, return expectation, and time horizon 2. Ensure that the resultant asset allocation is in sync with realistic risk and return expectations 3. Ensure that the portfolio is diversified at the asset class and security level 4. Do not chase fads, and, if doing so, ensure that the size of the exposure is commensurate with the risk of the investment 5. Employ and listen to experts who can help cancel the noise, apply fundamental principles, and interpret market events with reference to the investor’s context

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