Rupen Rajguru, Head – Equity Investments and Strategy at Julius Baer India
This is expected to be a “year of cooling down” with both growth and inflation rates set to slow down around the world, as monetary policy normalisation takes its toll and some pandemic-related constraints ease, says Rupen Rajguru of Julius Baer India in an interview to Moneycontrol.
He feels the inflation rate is expected to fall more than the growth rates. This, in due course of the year, should result in the Fed to pivot, which would be the key trigger for a return of a risk-on environment and supportive for equities, says the equity investments and strategy head.
Backed by his over 19 years of experience in Indian capital markets, Rajguru believes India remains an attractive investment destination with the relatively stronger economic growth and earnings cycle remaining the key pillars for the markets.
At a strategic level, “the four themes that we are looking at for 2023 include Financials, Domestic Manufacturing, Rural recovery and Aspirational India (ie.,premium consumption) and we would look at stocks to play these themes”, he says.
Do you think the finance minister will tweak tax rates to boost FMCG demand and help rural recovery?
While it is difficult to predict what the finance minister will announce in the Budget, it however seems unlikely that she will make any major changes on the taxation front, especially in a scenario where there have been challenges in terms of raising resources from divestments, and also considering the fact that the benefits of windfall tax from oil upstream companies could be missing next year.
The rural demand is expected to see gradually improving trends with softening inflationary pressures and better agri dynamics. Being the last major budget before the central elections in 2024, the government might prefer to increase spends on rural infrastructure which could have a multiplier effect on the economy.
Is it the right time to bet on the insurance sector?
We believe the insurance sector in India, both life and general, offers a structural growth opportunity, considering the low penetrations, rising income levels, and the overall improvement in understanding the need for having sufficient insurance. While the stocks and the sector could see periods of underperformance or outperformance (influenced by valuations and movement in the yields), we think one should look at the space from a longer-term investment perspective. In 2023, the insurance industry is expected to deliver mid-teen premium growth along with steady margins.
Considering the recent underperformance of the sector, especially compared to the performance of the overall BFSI segment, there could be an opportunity to add some positions here in a staggered manner.
Do you think the rural recovery theme will play out in the next few quarters?
We are constructive on recovery of the rural demand in the country. Rural distress has been evident in many pockets, where deficient monsoons and consequently a poor kharif crop have added to the woes of a populace reeling under the after-effects of the Covid-19 pandemic and high inflation.
However, we believe that farm incomes are holding steady, even though high inflation acted as a drag on consumption. Rabi sowing has been progressing well, and prices of the farm commodities are holding up. Consequently, farm income growth is expected to be relatively healthy in FY24.
With the inflationary pressures steadily cooling off and moderating farm input costs, coupled with steady farm incomes and the government’s continuing focus on improving rural/farm income, the rural demand is expected to see gradually improving trends.
What are the sectors that look attractive enough after recent correction, for 2023?
While there has been a small correction in the past few weeks, we think volatility in the markets may continue for some more time with several headwinds on the anvil, which can continue to provide interim opportunities. Our preferred sectors include BFSI, industrials, infrastructure and discretionary consumption (including auto), although we would remain mindful of valuations in some of the stocks or pockets.
After the recent underperformance, one can selectively start looking at large-cap IT and healthcare stocks in a phased manner from an investment perspective. Finally, we might see a tactical bounce in oil marketing companies (on back of lower crude price and extreme low valuation) and commodities (as China re-opens).
At a strategic level, the four themes that we are looking at for 2023 include Financials, Domestic Manufacturing, Rural recovery and Aspirational India (i.e. premium consumption) and we would look at stocks to play these themes.
After a healthy run-up last year, do you think the banking and financial services space still looks strong?
BFSI has been our top preferred sector for some time now, and we continue to maintain a positive stance here, albeit small intermittent bouts of profit booking. The sector is a quasi-play on India’s economic recovery, and the credit growth is expected to remain supported with the recovery in the capex cycle and focus on domestic manufacturing.
Also, the balance sheet for a lot of companies are one of the best in the past several years, despite the recent pandemic-related challenges, which should help them to renew their focus on topline growth. The NIMs are also expected to remain healthy on rate hike benefits and improvement in Loan-Deposit ratio. All these are likely to culminate in a steadily improving return profile and valuations for the BFSI segment.
What are the likely sectors that can see major re-rating post-December FY23 quarter earnings?
As mentioned earlier, although we have seen some corrections recently, it has not been meaningful enough to push any sector or segment in the attractive valuation trajectory as yet. We believe a large part of the multiple expansion is over for the Indian markets (we seem to be in the fair valuation trajectory), and the growth hereon would be largely driven by the earnings growth.
In fact, for some of the slightly expensive segments of the market (like consumer staples, some chemicals and mid-cap IT companies), the valuation premiums could be at risk in case the growth/outlook were to disappoint in Q3FY23.
Do you think the second half of 2023 will be better for equity markets than first half? Also what should be the strategy for 2023?
Yes, there is a possibility that the second half of 2023 could turn out better for the equity markets as compared to the first half. The Indian equity markets have begun the new year on a slightly cautious note, continuing the trend visible in December 2022. While expectations remain of softer rate tightening by the global central banks from hereon, concerns remain on the overall economic environment amidst the high interest rates and sticky core inflation.
This is expected to be ‘the year of cooling down’ as both growth and inflation rates globally are likely to slow down, as monetary policy normalisation takes its toll and some of the pandemic-related constraints ease. Overall, the inflation rate is expected to fall more than the growth rates. This, in due course of the year, should result in the Fed to pivot, which would be the key trigger for a return of a risk-on environment and supportive for equities.
Indian markets have been one of the best performing markets globally in CY22, aided by its relatively strong growth – both GDP and corporate earnings – and resilient domestic liquidity, a trend likely to continue in CY23 as well. However, in the near term, the markets seem to be running into a few headwinds – record high valuation premium to emerging markets (EMs) (although the valuations are only slightly above its own historical averages) which may attract some tactical shifts to other EMs, potential slowdown in exports on the back of global slowdown, and Fixed Income emerging as a viable investment option.
Hence, while we continue to remain constructive on the markets with a medium-longer term perspective, we believe there could be several interim opportunities in the near term as the markets adjust to the headwinds. Overall, we believe India remains an attractive investment destination with the relatively stronger economic growth and earnings cycle remaining the key pillars for the markets.
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