Anil Rego of Right Horizons
“The US economy facing a downturn for a prolonged duration, the slowdown in Europe, becoming more severe than expected, China continues to be cautious, reopening slowly, and Brent prices crossing levels of $ 100-110 per barrel are the major challenges to markets,” Anil Rego of Right Horizons says in an interview to Moneycontrol.
He expects the banking, auto and consumer discretionary themes to continue outperforming the following year.
The founder and fund manager at Right Horizons, a pioneer in the contrarian style of investing and a seasoned investor for over three decades, believes India is better placed compared to other advanced and emerging economies supported by government policies that are tailwinds for growth in multiple sectors.
“We expect the markets to be volatile in the near term since the US and Europe are expected to be in recession, but will do better over the medium to long term as the earnings growth is still intact,” he says.
What is the best suitable theme to bet on for 2023 and why?
We expect the banking, auto and consumer discretionary themes to continue outperforming the following year. India’s per capita income crossed the $ 2,000 mark, and with that, rising disposable income increases benefiting the consumer discretionary sector.
The building materials segment is also expected to be a beneficiary of the boom in discretionary spending in the next three to four years.
Similarly, due to governments’ PLI (production linked incentive) schemes and policies, global players’ preference for the China+1 strategy and now the interest due to Europe+1 on the back of rising energy costs and supply chain hurdles will make the manufacturing theme the biggest beneficiary.
After a cycle of muted demand in the auto space, new launches by OEMs, rising demand, and ease in availability of semiconductors are driving growth across segments, with EVs (electric vehicles) playing a critical part, and the segment is expected to grow at 45 percent CAGR over the next five years. We are optimistic about the sector due to the strong order book, capex plans announced by companies, growth in earnings on account of demand and softening of industrial commodities.
In a rising interest rate scenario, the banking sector passes on rate hikes through the floating rate loans while simultaneously delaying the rate hikes for deposits, benefitting from spreads and expanding margins. Banks reported strong topline growth due to healthy disbursements and higher loan rates, robust earnings growth on the back of promising advances and lower provisioning for loans. We expect the sector to continue to report solid earnings and perform better.
Do you see any kind of major challenge(s) that can bring equity markets down to June 2022 lows in 2023?
The US economy facing a downturn for a prolonged duration, the slowdown in Europe, becoming more severe than expected, China continues to be cautious, reopening slowly, and Brent prices crossing levels of $ 100-110 per barrel are the major challenges to markets.
An escalation in energy prices may drive weaker European growth. If the US dynamics don’t improve and Fed hikes continue for longer, leading to a stronger Dollar and continued outflows. More geopolitical tension and retail inflation for India persists are risk scenarios to be wary of.
Do you think the equity markets are still worried about likely recession in developed nations in coming year?
We expect the interest rates in the US & the Dollar to peak in the next year and witness FII inflows towards the emerging markets. Indian markets have become less sensitive to Fed rate hikes, US growth conditions & FII selling and have been resilient mainly due to the persistent domestic flows.
India is better placed compared to other advanced and emerging economies supported by government policies that are tailwinds for growth in multiple sectors. We expect the markets to be volatile in the near term since US & Europe are expected to be in recession, but over the medium to long term they will do better as earnings growth is still intact.
What is your advice to new investors/traders as we are going into 2023, especially after your great learnings of 30 years of experience?
The headwinds of 2022 are now a familiar terrain and are expected to continue to be so for next year, driving volatility. We expect emerging markets like India to see pockets of strength driven by specific catalysts, such as moderating inflation, and rate hikes to peak in the first half.
Investors can look to diversify across asset classes in the first half and as uncertainties fade, increase allocation towards desired assets for favourable outcomes. Large caps preferably banks, auto and healthcare are recommended during the first half and can be spread out as markets offer better opportunities for both positioning and growth across sectors and market caps.
Do you expect the Union Budget 2023 to be much better than previous Budgets? What are your general expectations?
We expect the government to continue focusing on infrastructure development, broad-based capex and manufacturing-led growth to strengthen the domestic sources of growth essential to maintain the momentum of steady economic growth in the country. The reforms will strengthen consumer electronics, semiconductors, durables and manufacturing.
Do you think the market is still cautious about FOMC’s stance for 2023?
We expect the interest rates in the US and domestically to peak next year, and markets have priced in the same nevertheless, a prolonged rate hike might lead to short-term volatility in the market but will be a minor blip from a longer perspective since the Indian equities are fundamentally better positioned with solid growth outlook relative to other emerging and advanced economies.
Considering the consistent rally in banks, are the FIIs increasing bank exposure?
The solid earnings contribution from the sector drives the consistent rally in the banks. The most significant gains came from banks reporting 35.8 percent YOY growth in their combined net profit during the second quarter of FY23, and the share of BFSI during the quarter in overall corporate profits reached a record high of 41 percent compared to its historical average of 21 percent. Banks being sensitive to rate hikes will continue its earnings momentum.
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