‘2023 may see a period of consolidation for Indian equities’

‘2023 may see a period of consolidation for Indian equities’

The possible end to rising interest rates and the prospect of a pivot may lead to renewed interest in emerging markets, according to Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies. However, given the relatively rich valuations, India may witness subdued flows compared to other markets, he said in an interview with Ashley Coutinho. Edited excerpts.

What is your outlook for Indian equities for CY23?

What are the negatives?

The key negative for India could be the global economic outlook. A prolonged or deeper recession than what the market is pricing in would lead to fall in exports in India. This would exacerbate the slowdown in India and put pressure on the rupee as the current account deficit rises.

What is your take on valuations?

India equity valuations are elevated and look likely to remain so as earnings growth have yet to catch up. So, the index may consolidate in the short-term.

Which are the sectors you are betting on?

We think most of the money this year will be made through themes. Our view is that defence and renewables will see continued heavy spending globally and India will follow suit and this theme will see heightened investor interest. Other themes we like are capex players exposed to spending towards industries/ services which help reduce supply constraints/ security issues, electronics as India moves away from China supply, and finally travel and entertainment (mainly hotels and airlines). Banking and consumer discretionary sectors would also be in favour, particularly if deflation becomes a theme globally in 2023.

The US Federal Reserve hiked interest rates by 50 bps in its last policy meet and has indicated that it wants to keep rates ‘higher for longer’. How do you see the trajectory of interest rates going forward?

We believe the global economic slowdown along with inflation will head south quickly this year. China could temporarily delay this due to supply constraints. If, as we expect, interest rates fall, then investors will look to emerging markets for growth, where there is a likelihood that interest rates can be reduced at a quicker pace than developed countries. This would lead to increased flows by investors to emerging market funds but, given relatively rich valuations, India may witness subdued flows compared to other markets.

What is the outlook for FPI flows going forward?

India has most definitely benefited from the negative sentiment towards China due to its Covid and regulatory policies. That said, the moment China indicated that it would reopen its economy the rebound in both sentiment and the markets was very positive. The lesson here is that while investors may tread more carefully going forward, the reopening of one of the largest economies along with beaten-down valuations mean a better risk-reward outcome and more incremental flows moving to China as compared to India.

Domestic institutional investors and retail investors have provided much support to the markets in the past year or so. You expect that trend to continue?

We expect both domestic institutional and retail investors to remain supportive albeit that for the first time in years there is a compelling and competing asset class, namely fixed income. Given the likelihood of one more rate hike by the RBI early this year, we feel investors will increasingly look to lock in higher interest rates through debt mutual funds and as a result incremental flows will move to fixed income investments.

What is your view on corporate earnings growth?

We have seen earnings being constantly downgraded over the past six months and we feel that most of this may be baked into analyst forecasts at this point of time. For 2023, we are conservatively pencilling in earnings growth of around 10-15% with the potential for upside revisions if our view of global interest rates falling quickly, materialises.

The private capex cycle did not take off as expected in FY22 and has lagged government capex during FY20-22. How long before things turn around and what are the factors that will drive the spending spree? What are the constraints?

We have maintained throughout 2022 that economic growth going forward would be fuelled by a global capex cycle towards increased spending in defence and renewables by governments and companies, government and companies investing in industries where there is an acute supply/ security issue and local travel/ experiences. Our view is that if government spending in these areas are slow then private capex will fill the gap to benefit from the demand going forward.