Madanagopal Ramu of Sundaram Alternate Assets
The first half of 2023 is likely to see some moderation in economic growth expectations across the world as well as in India as high interest rates may hit investments and consumption, says Madanagopal Ramu of Sundaram Alternate Assets. He sees an earnings cut over the next two-three quarters, impacting valuations.
Given the current valuations, many still believe there is still some value left in PSU banks, but much of the low hanging fruit is already done, the fund manager and head of equity says in an interaction with Moneycontrol. “So be cautious is what we advise. Stick with quality is always our mantra.”
On the IT space, Madanagopal Ramu, with over 15 years of experience in the Indian financial markets, feels the sector can bounce back in 2024, but 2023 will mostly be a low growth scenario for Indian IT companies.
He believes that in 2023, investors should accumulate technology companies in India. Due to existing shareholder selling, these stocks can offer good entry points from a four-five-year perspective, he says.
Madanagopal currently manages an AUM of around Rs 3,400 crore and has over six years of experience in managing funds.
Do you really believe the 2023 will be normalization year for economy and earnings?
We are likely to witness two opposite phases of macros, in 2023. In the first half, we will see moderation in economic growth expectations, globally as well as in India due to high interest rates having an impact on investments and consumption. We will see an earnings cut over the next 2-3 quarters, impacting valuations.
Indian indices benefitted from flows shifting away from China in 2022. Nifty50 almost remained flat despite an earnings cut in 2022. But in 2023, we expect China to shift focus back to growth and this can shift some of the flows back to China, and moderate India’s valuations. The emerging covid situation and the response from the Chinese government will be key factors to observe.
We expect volatility in Indian indices in the first half; clearly, valuations are on the higher end of the band. But as we move closer to end of 2023, we expect inflation to moderate, giving RBI options to provide monetary stimulus. With 2024 being an election year, we expect the government to spend on rural and infrastructure development leading to a recovery in consumption in India. So, we expect indices to be under pressure in H1 2023, but in H2 we expect a recovery.
With the hike in real interest rates, do you see an excellent opportunity to invest in fixed income segment?
In the long term, our belief is that equity is the best asset class to generate material alpha over inflation. A key for long term savings. You need to be extremely lucky to bring the allocation back to equity at the appropriate time. I would rather advise investors to stay invested rather than shifting in and out of equities due to short term interest rate movements.
If the inflation remains sticky for at least another 2 years, then we can argue for fixed income. Our expectations are that inflation and interest rates will start falling in H2 2023.
Is the banking space at top of your overweight list for 2023?
Banking sector in India saw a back-to-back impact starting from the corporate NPA cycle, real estate sector NPAs, mid corporate stress and followed by the Covid impact. With much of the asset quality pain behind, banks are benefiting from the low NPA cycle and loan growth backed by capital availability after many years. It is benefitting private banks like ICICI Bank and Axis bank, but more so PSU banks, because they have not performed for so many years.
Having said that, we are always concerned about the low profitability of PSU banks. Low margins in a leverage business like lending is a big risk if you are facing an economic slowdown. We expect profitability ratios to moderate from peak Q2 & Q3 FY23 as economic growth slows down, leading to moderation in loan growth assumptions, marginal uptick in credit cost and lower than expected margin due to higher costs. When these happen, the impact would be much higher for low margin PSU banks more than private banks.
Given the current valuations, many still believe there is still some value left, probably yes, but much of the low hanging fruit is already done. So be cautious is what we advise. Stick with quality is always our mantra.
Also, is it the right time to bet on IT and Pharma sectors considering the current environment?
IT sector has underperformed in 2022 on the expectation of slowing demand for IT services in US & Europe. Valuations have moderated meaningfully from peaks. We believe earnings expectations and valuations must moderate further in the IT space to make it attractive. The sector can bounce back in 2024, but 2023 will mostly be a low growth scenario for Indian IT companies.
We rather believe that in 2023, investors should accumulate technology companies in India, due to existing shareholder selling, these stocks can offer good entry points from a 4–5-year perspective.
Pharma is a structural sell, with 7-8 percent pricing decline in the base business, the volume growth must be meaningfully higher to even deliver 15 percent earnings growth sustainably. Rather we believe investors should play specialty chemical companies in the CSM, CDMO space. Due to the China +1 story, we are seeing meaningful growth opportunities in this space.
Do you think the coming couple of years will provide huge bottom-up investing opportunities?
Quality growth, which took a back seat in last 3 years, will make a comeback over next 2 years. Companies which provide more visible growth with better balance sheets, have chances to outperform compared to defensives, capex cyclicals.
Indian markets benefitted from economic uncertainty elsewhere particularly in China. In 2023, we expect some of these flows to reverse. Having said that, we expect long only funds to increase meaningful allocation to India as and when they see a value opportunity, and this can provide sufficient protection on the downside for specific sectors and stocks. it’s going to be an ideal market for stock pickers.
What is your great learning from 2022 and do you expect 2023 to be a great year for equities?
Market movements in the short term are driven by flows and cyclical factors, but in the long run, quality growth-oriented companies have helped wealth creation. 2023 will be a year, where investors should remember this and avoid value traps. Over the next 2-3 years, alpha will depend on picking the right businesses rather than just PE multiples-based selections.
Investors must pay attention to consistency rather than cyclical beneficiaries, because a lot of short-term cyclical factors played out in the last 3 years since covid and a lot of these will normalize in the beginning of 2023.
What are the possible challenges in coming year to be faced by equity and economy?
On the challenges front, resurfacing of Covid in India leading to lockdowns can be negative both for markets and economy, and given the current high valuations and inflation, lockdowns can hit economic recovery and have a meaningful impact on equity markets. China recovery along with the supply constraints in commodities due to the energy crisis in Europe can keep inflation higher for a prolonged period, this can impact the performance of equities in 2023.
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