Deepak Jasani is the Head of Retail Research at HDFC Securities
Deepak Jasani of HDFC Securities feels 2023 could be a tough year for equities and may yield returns similar to that in 2022 but with higher volatility. History suggests that globally stocks won’t bottom until the Fed cuts rates, Jasani told Moneycontrol in an interview.
He believes there is a downside risk to FY24 consensus earnings and a limited scope of valuation upside. This will keep upside for index capped, said Jasani, who is a chartered accountant by profession.
On the sectoral front, the Head of Retail Research at HDFC Securities feels, BFSI, industrials and automobiles may outperform the Nifty and other sectors due to the tailwinds enjoyed by these. Edited excerpts:
Do you think the worst is over for the market, considering the turmoil seen so far, or do you expect June lows once again in the coming months?
Though the near term downtrend seems to have been done with, Nifty does not seem to have made an intermediate or a long term bottom. Though incremental news flow from the regulatory side may not be very negative from now on, the impact of the rate hikes on macroeconomics globally and on micro performances may now become more visible. This may lead to earnings downgrades.
The Union Budget in the end of January could prove to be a trigger (and later a disappointment?) for the markets. Risk appetite of global investors may not expand in a hurry and in case the interest rates globally remain elevated, the cost of capital may remain high pulling down equity valuations. Technically the markets have become weak from an intermediate perspective and the June lows may come in for testing, if not getting breached in the first half of 2023.
What are the key challenges and supportive factors for the market in coming year?
2023 could be a tough year for equities and may yield returns similar to that in 2022 but with higher volatility. History suggests that globally stocks won’t bottom until the Fed cuts rates. We believe, there is a downside risk to FY24 consensus earnings and a limited scope of valuation upside. This will keep upside for index capped.
This view could change if we see economic growth accelerating and interest rates peaking (and then start falling) soon across the globe and also in India. India however remains a buy on dips market given its relative attractiveness compared to other emerging markets.
Do you think the hawkish tone adopted by Federal Reserve and expected slowdown could cap the market upside?
In December, the US Fed has slowed the rate of rise as the rate of inflation has slowed but said it was too soon to talk about cutting rates as the focus is on making the central bank’s policy stance restrictive enough to push inflation down to its 2 percent goal. The Fed boosted its benchmark rate a half-point to a range of 4.25 percent to 4.5 percent, its highest level in 15 years.
The policymakers also forecast that their key short-term rate will reach a range of 5 percent to 5.25 percent by the end of 2023. The US economy could slow to a crawl in 2023 and unemployment could jump to as high as 4.6 percent, as the Federal Reserve tries to clamp down on high inflation, the central bank’s latest forecast shows.
For the first time, several senior Fed officials also predicted a recession next year. While the rate hikes could make the markets jittery time and again, the interest rates in the system may not fall significantly even after the Fed stops raising rates as the US Fed will not subscribe to the Govt Bonds in the same manner and to the same extent as in the past.
High interest rates could make equities less attractive and cap the upsides. Only when there is clear sign of US Fed relenting and showing its keenness to cut rates, the markets could make a bottom and start a sustained upmove therefrom.
Although Indian interest rates may not see similar rises from hereon, FPI sentiments and flows are important for the rally to pick up momentum. In case the global risk appetite remains fragile, India cannot go against the global market trend for long.
Also we in India will start the general election outcome discounting from H2CY23.
Do you see possibility of major earnings downgrade and cut down in growth forecast in 2023?
Earnings downgrades could happen in sectors like IT, Oil & Gas and Metals, but on an overall basis the downgrades may not be alarming as Indian listed corporates have learnt to live and prosper in uncertain times by taking market share from unorganised sector and implementing cost rationalisation. They have seen major disruptions since 2016 and have done well to prove pessimists wrong.
What are the sectors that can be outperformers next year?
BFSI, Industrials and Automobiles may outperform the Nifty and other sectors due to the tailwinds enjoyed by these. This apart the defence and renewables stocks could bounce up faster than others given the visibility of revenue and margin growth in these two.
Do you think it is the right time to bet on hotel, tourism, travel etc stocks that impacted to Covid worries?
While current indications suggest that the Covid resurgence in India may not be as strong as in China or other countries, one will have to watch the situation closely. Also revenge travel may be coming to an end soon and hence the high fares/room rents may normalise from February onwards.
Travel and tourism stocks have seen a good rally so far and if the occupancy levels remain high even in H2CY23, one can relook at them after a price correction.
Are you betting big on pharma and healthcare space for 2023?
Pharma and Healthcare stocks have done well over the past few days on expectations that these will do well if India sees another large wave of Covid. While currently one does not know as to whether such a wave will happen or not, the fact that the pharma stocks have not performed lately in line with the Nifty, leaves a margin of safety for investing in them especially because the domestic market has done well for them over the past few quarters and the export markets have stabilised as price competition has eased for most products.
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