Unmesh Sharma of HDFC Securities
Unmesh Sharma of HDFC Securities believes that the first half of 2023 will see volatility due to multiple factors such as moves by central banks in their fight with inflation, concerns around recession, geopolitical tension, and the Covid crisis.
Within the EM (emerging markets) basket, the institutional equities head with more than 18 years of experience in the field of capital markets believes India finds itself in a much stronger position than the taper tantrum of 2013. “This is due to stronger domestic fundamentals and well capitalised banks and corporate sector. External vulnerabilities persist but are lower than 2013 and many EM peers,” he says in an interview with Moneycontrol.
In the Union Budget 2023, Sharma believes the government should increase the capex by 20-25 percent with increased sectoral allocation and expansion of the PLI (production linked incentive) scheme to other sectors. “This would help ‘crowd-in’ the private sector capex as well.”
Do you expect significant volatility in the market in January, especially during the quarterly earnings season and ahead Union Budget 2023?
Our view is that the first half of the year (CY 2023) will see volatility due to multiple factors including moves by the central banks in the fight against inflation, concerns around recession and news flow around geopolitics and the fight against Covid.
In this context, we believe that the Budget and the earnings season will add to the volatility but only by a tad. On the earnings season, we see earnings getting delivered in line with expectations or slightly disappointing. We believe that the market expectations of IT revenue growth, strong domestic urban demand and margin improvement may not be fully met.
Over the last decade, the importance of the Union Budget from a markets perspective has reduced. This is because the government (rightly) now is open to announcing major policy measures outside of the budget as well. It is also a sign of maturity as tax slabs have been rationalised to a large extent and remain stable. In that context, unless there is speculation on tax changes in the capital markets, we do not expect any major driver of volatility.
Do you expect the Union Budget 2023 to be populist as well as progressive? Which segments do think will be in focus? And, what about your wish list?
The Union Budget in February 2023 will be the last full budget announcement prior to elections (2024 being an election year will see a ‘vote on account’). Needless to say there are some concerns on it being too populist. We believe this concern is misplaced.
As in the past, we feel it will be a balanced budget. Anecdotally, we are experiencing a K-shaped recovery which would cause the government to continue to support the rural population at the bottom of the pyramid. The Capex push from the government for long term asset creation will continue and expand.
We think the government should (and will) continue support for the rural population. The one-off support from the Covid period is ending and would ‘partially’ be compensated with higher allocation on food subsidy, employment guarantee and rural infrastructure.
We believe the government should increase capex by 20-25 percent with increased sectoral allocation and expansion of the PLI (production linked incentive) scheme to other sectors. This would help ‘crowd-in’ the private sector capex as well.
Despite this, we think the government will have scope to continue on its path towards fiscal consolidation and reduce the deficit by ~50bps to sub 6 percent.
Do you think the sentiment will remain subdued for IT stocks for the coming year or just for first half of next calendar year?
The Indian IT industry’s exposure to the US and European markets makes it susceptible to any downturns that they might face. Needless to say, the likelihood of a near-term recession looms over key western economies, which would cause Indian IT stocks to remain subdued over the first half of CY23.
We will revisit this view in mid 2023, as we gain visibility around global demand and therefore the order book stickiness of Indian IT companies.
Do you think renewables and defence themes will continue to play out in 2023 as well?
The renewables and defence themes are structural long-term plays that have considerable run-way ahead of them. Unsurprisingly, the secondary market stocks on these themes have appreciated considerably over the past 18 months.
We believe that the renewable and defence market opportunity is largely priced into the respective stocks, and investors are now keenly observing the companies’ execution capabilities. Hence, we don’t expect a similar run-up in these stocks in CY23.
Indeed, these high growth stocks are prone to downside volatility if the companies are unable to execute at the expected pace and quantum.
Do you find sectors like hotels and travel and tourism that suffered steep plunges recently attractive now? Also do you expect strong capacity utilisation there?
Travel and tourism stocks have underperformed over the past 3 months as the Covid-19 situation in China continues to worsen. Whilst the travel and tourism industry saw a good operating recovery in FY22, the industry is yet to recover to pre-pandemic levels; hotel occupancy rates and airplane passenger numbers reflect an improving trend but not at par with pre-FY20 levels. This provides an extra leg of incremental growth for these stocks from their current entry-point.
Barring an escalation of the domestic and global COVID-19 infection spread, we expect the travel and tourism stocks to do well in the forthcoming quarters as the return to mobilization normalcy continues. Short to medium structural trends of pent-up demand and revenge spending are still intact for these sectors.
What are the big challenges for the equity markets in first half of 2023?
The big headwind for the market in 2023 will be elevated volatility. This is on account of multiple factors most notably the central banks. Markets have been used to coordinated action by Global Central Banks since the 2008 crisis- that alignment has dissipated with the ECB (European Central Bank), BoJ (Bank of Japan), China and the US (and indeed India) fighting individual battles.
Recession looms as we expectedly find ourselves in the midst of a long and arduous fight against inflation. While there is some convergence on view on rates, the elephant in the room is the effect on markets of Quantitative Tightening. China’s fight against Covid has brought in an additional imponderable.
Within the EM (emerging markets) basket, India finds itself in a much stronger position than the taper tantrum of 2013. This is due to stronger domestic fundamentals and well capitalised banks and corporate sector. External vulnerabilities persist but are lower than 2013 and many EM peers.
Within this, there is no comfort on valuations. The market has come off in the last week but valuations remain elevated. In the uncertain environment that we currently face currently, valuations should have been 1 standard deviation below the long term mean. It is the other way round. While we don’t see markets come off a cliff due to domestic investor participation, we feel the risk is to the downside.
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