Credit | Capex: ETMarkets Fund Manager Talk: This fund manager is positive on the 3Cs
In an interview with ETMarkets, Soni, who is a seasoned asset management professional with a wealth of experience spanning over 25 years, said, “From a valuation perspective, markets are no longer cheap. We are trading at ~19x 2024 EPS, which is a slight premium to our average P/E over the last 10 years” Edited excerpts:
We are in the last month of 2022 – we have recovered from historic highs. Where do you see the markets heading in 2023?
The Indian economy and markets have shown remarkable resilience thanks to strong domestic demand. High frequency indicators such as GST collections, energy consumption, tolls and tax collections continue to point to robust growth in the underlying economy.
In addition to continued consumer demand, we are also seeing a recovery in CAPEX. Credit growth is now at the highest level of the last decade at 18 India is one of the fastest growing major economies in the current year and is expected to remain an island of growth in a world facing fears of recession in the coming year.
Nifty EPS growth continues to be healthy at the teen level, driven by strong growth in domestic sectors such as automotive, capital goods, telecommunications and banking.
As the pressure on commodities eases, we will see improved profitability in user industries.
From a valuation perspective, the markets are no longer cheap. We are trading at ~19x 2024 EPS, which is a slight premium to our average P/E over the last 10 years.
The overall outlook for the Indian market is good. The year 2022 has seen low absolute returns, but high relative outperformance against global markets. Over the next 2-3 years, we expect absolute returns to be healthy as well.
The year 2022 has been full of volatility and global events that impacted Indian markets. Will the headwinds of 2022 continue to haunt equity markets in 2023 as well?
Indeed, the year 2022 has had more than its fair share of macroeconomic headwinds – the Russian-Ukrainian conflict, soaring commodity prices, the highest inflation in many decades and aggressive rate hikes by central banks, weak currency, etc.
As we look to 2023, global economic growth rates are muted by the IMF and OECD. The slowdown in global growth is having a negative impact on our exports.
Slowing exports and further US interest rate hikes are headwinds for India. On the other hand, the fall in commodity prices bodes well for India.
Steel prices are down 40% in the past six months and oil prices are down 30% from the recent high. India is the third largest oil importer and further moderation in oil prices in the wake of slowing global growth could benefit India.
Overall, we believe the macroeconomic setup and global environment looking ahead to 2023 is better for India. Of course, we will have to remain vigilant to any escalation on the geopolitical front.
Amid rate hikes, global headwinds and fears of a slowdown, which sectors are likely to monopolize attention in 2023?
We are positive on three Cs-Credit, Consumer and Capex. We believe banks are well positioned and will continue to perform well thanks to the rising NIM, good asset mix and strong credit growth. Consumer discretionary and automotive continue to see strong demand and a decline in commodities should be positive.
Finally, we expect corporate and government CAPEX to pick up and capital goods and sectors like cement could do well.
The rate continued to rise in 2022 – do you see any further rate hikes in 2023?
While inflation remains above the RBI target range, we have passed the inflation peak. As we approach 2023, we expect some moderation in commodity prices.
This, coupled with the current year base effect, will drive the CPI down to 5-5.5% by mid-2023. We expect future rate hikes to be lower and policy rates could peak at around 6.50% early next year.
While lending rates will mimic policy rate moves and therefore could rise further, we believe that 10-year bond yields, which focus more on the future direction of rates, have likely already peaked.
How should revenues develop in 2023?
We believe India will be one of the few major economies with good visibility on revenue growth. We are looking at a CAGR of around 15% in earnings over the next three years.
Unlike last year, where most of the earnings growth was led by producers of commodities like metals etc., the recovery in earnings is expected to be broad based.
As we have already touched uncharted territory, what type of fundraising do you envision for the IPO? Do you see more SME IPOs on the street?
I understand that the market has hit a new high, but that’s the nature of the stock market. As companies continue to grow and profits increase, markets will continue to reach new heights. The right question to ask is whether the markets are overvalued.
According to our assessment, the market is trading at `19x 2024 EPS. Although this is slightly higher than the last 10 year average of 18x, it is still a fairly acceptable range.
Coming to the IPO, we had seen a lull in the IPO market after some mega issues earlier. In the future, we will have an increased supply of paper. In addition to IPOs, we will also see significant PSU divestments like
etc
We do not track SME IPOs.
According to two custodians, NSDL and , the total number of demat accounts is 9.28 crore as of April 30, 2022. This number is almost three times the number recorded in March 2020. What kind of growth do you expect for investors of detail in 2023?
We have seen a welcome increase in retail interest in equities. We see about 20 lakhs new Demat accounts every month. With a growing savings pool, we believe there will be structural growth in the Indian retail investor base.
Of course there can be some cyclicality in equity market performance, we are quite positive on this trend from a medium term perspective.
In addition to direct retail investors, we have also started to see a steady influx of long-term pension funds like EPFO.
These two elements can be a good stabilizer and counterbalance the volatile fluxes of FII. It is good to see Indian retail investors participating in India’s growth story.
The mutual fund segment is expected to see good growth in 2023. What is your advice to new and seasoned investors?
As the savings pool grows, all financial products will experience accelerated growth. India’s mutual fund industry will also benefit from this trend. Mutual funds remain the cheapest and easiest way to access the market.
Indian equities are among the promising asset classes in the medium and long term. However, it comes with its fair share of volatility. It is therefore very important to take a view of at least 3 to 5 years when investing in stocks.
Take the time to understand your risk profile and your time horizon. Take professional help if you can. Make the right allocation and let the power of compounding work for you!
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
