Santosh Joseph of Refolio Investments
“It is reasonably fair to think that largecaps have done their bit to take their markets to all-time highs,” Santosh Joseph of Refolio Investments says in an interview to Moneycontrol.
Joseph believes now is the time for the lower order smallcap and midcap to contribute and punch above their weight to outperform their indices and create their own all-time highs while also contributing meaningfully, in turn making the investors in the mid and small a cap good return for their money.
The Founder of Refolio Investments and a financial services professional with over 20 years of experience in asset management, banking and insurance feels the bond markets are definitely in a kind of a sweet spot right now.
“For a discerning investor the risk-reward opportunity is very compelling right now and I think bond markets are back to where they were about two and a half or three years ago in terms of nice opportunity to enter,” Santosh says.
Your thoughts on RBI monetary policy decision.
With the recent Monetary Policy Committee (MPC) just done, one thing is clear that this hike was what many market people were coming to a consensus with and that is exactly what happened: a 35 Basis hike. This leads us to believe that inflation is showing signs of coming under control and even the central bankers are in a sense satisfied with the measures so far.
We can clearly notice that the stance, though being accommodating, gives us abundant caution saying that we do not want to be in a complacent mood at this particular point of time. What this means is they are not shy to come out with rate hikes if required in the future, but also open to the data coming in before taking any further action as far as rate hikes are concerned.
Globally, we have seen a similar stance where the rate of increase is largely slowing down, though the number of hikes are yet to be ascertained but definitely the acceleration in the rate hike has seen a bit of a cool off with this recent announcement.
World Bank revised India’s GDP growth for FY23 to 6.9 percent, but lowered FY24 estimates to 6.6%. How do you see this?
The World Bank data for FY23 and FY24 clearly is very reassuring as far as our Indian economy is concerned. We need to see this data in the light of how the rest of the world is doing. A 6.9 percent for FY23 and a 6.6 percent for FY24 is still a very good headline number.
FY23 numbers will be better than the past one or two years because of the low-base effect. FY24 could be marginally or slightly lower. Again these are estimates and I believe at any level both these estimates are great and puts India in a sweet spot across the globe.
It just shows the robustness and the ability for the Indian markets to bounce back in the midst of massive global headwinds.
Do you find the bond markets more attractive now?
The bond markets are definitely in a kind of a sweet spot right now, many market participants have an opinion that either we are already at the peak of the rate cycle. While a small section believes that we are already on the declining trend for a rate hike cycle, irrespective of what the view is, I think the number that is presenting itself right now in the Bond market is a great opportunity.
For a discerning investor the risk-reward opportunity is very compelling right now and I think bond markets are back to where they were about two and a half or three years ago in terms of nice opportunity to enter, make that yield and also be prepared for a capital gains in the event of a rate cut cycle that will begin at sometime next year or later.
Are the valuations extremely expensive for all industries that are related to domestic manufacturing?
The valuations for the domestic manufacturing industry seems a bit stretched, considering that we are not used to paying the premium for the manufacturing in the past and many market participants believe that these kind of high valuations are at some level going to be justified because of the scope we have right now.
With the Atmanirbhar initiative or even the PLI (production linked incentive) initiative, we’ve seen many industries benefit from, and manufacturing is one sector that’s going to benefit and will benefit even more in the further of the PLI scheme. The point to look at here is, the deep opportunity that lies for the manufacturing sector to expand from here, the China +1 one or maybe even at some level a Europe +1 story is just not a narrative but this is really unfolding right in front of us.
So when you look at those opportunities and when you look at the valuations, though they may seem a bit stretched right now, if these play out I think the valuations will automatically get adjusted and these premiums that we see right now will not seem so hefty as it is.
We will also soon realize that manufacturing which did not get a meaningful share for a long time in our overall markets may start making an impactful presence in the overall market scenario.
Do you see significant run-up in midcaps and smallcaps over largecaps in 2023?
It is fair to believe that one of the expectations for the markets in calendar year 2023 is to be led by mid and small caps. When we look at the data in the year 2022, we look at a selected group of stocks maybe 10 or 15 contribute to a significant portions of returns that indices gave and even the broader markets have not participated in these last 2-3 months rally of the market in general. Even if we take the last one year return, though Nifty has made all-time highs, the midcaps are not close by and the small cap is still running in the negative territory.
Now, usually when Nifty makes a new high, it’s when the markets consolidate and then the midcap and the smallcap plays catch up and they even out the skew in the market. When you see a broadbased rally, the midcaps, smallcaps and the largecaps contribute to the overall growth of the market, they usually outperform the largecaps.
Therefore, based on this, it is reasonably fair to think that largecaps have done their bit to take their markets to all-time highs. Now is the time for the lower order smallcap and midcap to contribute and punch above their weight to outperform their indices and create their own all-time highs while also contributing meaningfully, in turn making the investors in the mid and small a cap good return for their money.
Which are the sectors that have margin potential in 2023? Also is it the right time to start betting on companies that have margin expansion potential in 2023?
In 2023, many industries and sectors will see a lot of benefit on margins because for the last 2-3 years they were under severe stress. It began with Covid followed by oil prices, then inflation and the interest rates. In spite of all these severe headwinds that we went through, many companies have been able to absorb these inflationary and rate input costs and also have been able to pass on some bit of the inflation on to the end consumer.
Going into 2023, some bit of cooled off of input prices, better logistics prices, growth in the business, all these things will lead to margin expansions. Now, clearly there are many sectors that have taken a beating and one sector that stands out right now has been the IT sector, after a blockbuster 2021, 2022 has been a disappointing year for the IT sector and slowly they seem to be consolidating and they might be around the bend in terms of turnaround.
We might see margin improvement there, likewise in many sectors that will benefit from lower input prices, lower logistics, lower fuel prices and maybe interest rates that they have got readjusted to post these rate hike cycles that we have witnessed.
So I think, not only one or two singled out industries, the whole market itself is going to benefit from inflation which is now largely factored in and managed and bought into control, rate hike cycle which is almost at peak, input costs and the benefit of passing on price hikes to consumer where they will get better margins is all into play. I think going into FY 2023 you will expect not one or two but many sectors to benefit margin expansion.
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