Sonam Srivastava is the Founder of Wright Research
“While it is difficult to time the market or the end of a geopolitical conflict, we expect these events to be transitory and the market to come back strong in FY23,” says Sonam Srivastava, founder of Wright Research, in an interview with Moneycontrol.
The current bets are on Metals, Energy, Banking, and Technology. Stay away from Autos, FMCG, Cement, and Real Estate, says the quantitative investment management and trading professional.
In FY23, according to Srivastava, there could be a bounce back into the reopening theme and consumer space. In addition, “the defence sector might be attractive, and sugar will rise due to ethanol demand,” says Sonam. Edited excerpts:
Are you happy with the returns provided by the market in FY22?
FY22 was a remarkable year for the market not only because of the rally in the first half of the year but also because of the robustness of the market despite FII selling and the precariousness of the global markets in the second half of the year. While Metals, Realty and PSUs and other cyclical sectors flourished in the first half, Technology gave competitive returns at various times. In addition, energy and Metals again picked up steam as the Ukraine tensions mounted at the end of the year.
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The markets expanded a lot with rising domestic demand and retail participation, which was a big win for the Indian market. The robustness of the economy, even with all the nervousness, was also commendable.
Do you expect similar returns in FY23 as well?
Everyone is looking at the easing of tensions in Ukraine to bring recovery for the Indian market from these levels. The market is relatively undervalued compared to historic levels, and we expect a relief rally to boost the market. The commodity inflation that has been marring the global economy could pass and prove transitory when the Ukraine conflict ends.
We could see the market becoming strong again as that happens. While it is difficult to time the market or the end of a geopolitical conflict, we expect these events to be transitory and the market to come back strong in FY23.
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What are the expected risk factors for the market in FY23?
The geopolitical crisis has pushed up commodity inflation, which is a worry. Many industries in India will face margin pressures and earn downgrades if the situation does not resolve. However, we believe that India and the global economy have remained robust during the Covid supply shock. If the commodity inflation is transitory, the market will spring back up.
Another concern is the US Fed, which is trying to handle inflation by raising interest rates, which is a trigger for funds leaving risky assets like Indian equities. Greater clarity by the US Fed on their plans and their effectiveness at controlling the economy would help the Indian market get stabilised.
Is there any possibility of the US entering into recession mode?
The rise in CPI or inflation that the US and the world are seeing right now is not pure monetary inflation caused by excessive money supply. Instead, the inflation is because of two primary reasons — the Covid supply shock and the Commodity inflation caused by the Ukraine crisis. What is worth noting is that both of these events are transitory, and the economy in the US remains quite robust underneath.
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Looking just at the inflation number and growth slowdown without accounting for the exceptional transitory shocks makes many call it stagflation but the underlying economy, especially in the US, remains relatively robust. So, we don’t foresee a risk for recession.
The market is battered and has priced in some of this risk. As a result, we expect a rebound when the transitory shocks end.
Why are Indian markets so resilient in comparison with their global peers?
For the last six months, the Indian markets have been battered, and we are in undervalued territory. With the underlying economy remaining strong and the earnings cycle being strong the Indian market does command a favourable valuation and has been able to hold firm.
Another factor driving Indian investors to expand their stakes is the growing depth of the domestic market and the growing number of investors who see Indian equities markets as the best place to park their money. In the past few years, retail expansion and penetration to new investors have been unparalleled, and the increased depth is sustaining the markets.
Do you think the worst has already been priced in by the auto space, or more declines are likely to be seen ahead?
The auto space has been hit by one issue after another. First, Covid hit demand in the sector badly, followed by the chip shortages. Then, with rising crude and metal prices, the sector again faces a big supply shock while demand itself has not picked up.
The auto sector has been the worst-performing sector in the last month and has lagged quarterly and yearly, which hints that the worst is priced in. Nevertheless, we expect the sector to bounce back once the Ukraine crisis resolves but recommend that investors be cautious given the challenges.
What are the sectors to buy or avoid for the coming financial year?
Our current bets are on Metals, Energy, Banking, and Technology, while staying away from Autos, FMCG, Cement, and Real Estate. In FY23, we could see a bounce back into the reopening theme and consumer space if and when the rebound happens. In addition, the defence sector might be attractive, and sugar will rise due to ethanol demand.
Finally, in a rising interest rate environment, we expect Banks to do well, and Technology and Pharma would flourish as US rates rise because of their US exposure.
We have to see the effects of the war on commodity prices go away before we look at consumer, auto, and infrastructure-linked sectors.
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