Venugopal Manghat of HSBC Mutual Fund
Fiscal consolidation is an important theme for Budget 2023, Venugopal Manghat, chief investment officer – equity of HSBC Mutual Fund, said in an interview to Moneycontrol.
HBSC MF expects the government to maintain infrastructure spending and focus on manufacturing production-linked incentive (PLI) scheme, logistics, rural development and employment creation, said Manghat, who has more than 27 years of experience in asset management.
For the IT sector, Manghat said the slowdown is yet to be fully incorporated in analyst estimates and the growth outlook for CY24 is also uncertain. Valuations are still not at a discount to the long-term average and so the chances of a rally in IT stocks are limited, he said. Edited excerpts:
What could be the priorities that the Budget 2023 would focus on?
The Indian economy has bounced back strongly post the pandemic, with GDP growth in the current fiscal year expected to be around 7 percent. The government provided the necessary support which enabled the economy to bounce back. However… some of the support needs to be withdrawn to contain the fiscal deficit. We, therefore, see fiscal consolidation as an important theme for this budget.
While we expect growth in FY24 to remain robust, it will face a drag due to slower global growth. Therefore, there remains the need to continue to offer support to help boost growth and productive capacity of the economy. The government has ably done that till now with its focus on infrastructure spending and supporting manufacturing through schemes like the production-linked incentive (PLI) scheme. We expect the focus on these to continue.
Finally, certain segments of the economy have lagged in the recovery like rural. Also, areas like agriculture have been impacted by an increase in the price of products like fertilisers. We, therefore, expect some form of support to continue in order to support these segments. We expect a limited change in direct taxes in the Union Budget.
Do you think the fiscal deficit estimates for FY24 will be below 6 percent of the GDP?
The finance minister has maintained her commitment to fiscal consolidation and guided for a fiscal deficit of 4.5 percent of GDP by FY26. In line with this commitment, we expect the fiscal deficit to be reduced by 50 basis points (bps) to below 6 percent of GDP for FY24.
However, there are some wild cards, given the uncertain geopolitical and global macroeconomic situation. The price of commodities like crude oil and fertilisers as well as the global slowdown are some of the factors which could upset the fiscal math. The recent moderation in crude prices is clearly a positive for India. We expect the government to stick to its fiscal consolidation roadmap.
Do you expect any significant reforms to be announced by the finance minister in the Union Budget 2023?
We don’t see any major change in the government’s focus and policy direction. We expect the government to maintain a strong focus on infrastructure spending. Focus on manufacturing (PLI scheme), logistics, rural development and employment creation. There is some possibility of income tax rationalisation, i.e. change in slabs and tax rates, although major changes are unlikely.
What are the best investment themes for 2023?
We see several structural themes for India, namely a boost to manufacturing supported by the global supply chain shift away from China, increased localisation and exports supported by schemes like the PLI and capex in areas of new energy to aid India’s green transition. Government infrastructure spending also remains a significant growth driver for the economy.
We, therefore, remain positive on domestic cyclicals. We also see banks benefiting from this revival in manufacturing and an increase in private capex. Bank balance sheets are in good shape and valuations are reasonable. With a large economy like India, consumption remains a long-term structural theme. However, valuations are high and one has to be selective in terms of choosing stocks in the sector.
Will the market end 2023 flat, considering the global environment? What are the key challenges in the current calendar year?
It is hard to predict near-term returns for the market with any degree of certainty, especially in the current volatile global geopolitical and macroeconomic environment… The degree of slowdown in developed economies, inflation in the US, how much further Fed tightening is still to come are some of the questions we need to grapple with.
Also, the trend in prices of key commodities like crude oil and fertilisers.
Domestically also, higher interest rates are likely to slow consumption. The impact of sharp rate increases by the Reserve Bank of India is yet to be felt. Still, we believe India remains relatively better placed and will be one of the fastest-growing economies in the world in CY23.
Do you see any big rally in IT stocks in the second half of 2023?
Structurally, we believe Indian IT remains well-placed to continue to gain market share in the global IT services market. We expect the trend towards increased outsourcing to continue. However, in the near term, IT companies are starting to witness some growth deceleration as key developed markets are facing a slowdown.
We think the slowdown is yet to be fully incorporated in analyst estimates and the growth outlook for CY24 is also uncertain. Valuations are still not at a discount to the long-term average. So the chances of a rally in IT stocks are limited.
Do you see any possible earnings downgrades in FY24?
We see a mid-teens growth in FY24 as a reasonable scenario. FY23 has seen significant pressure in margins for companies in several sectors due to the surge in commodity prices, high freight rates and higher energy costs.
As most of these are moderating, we see a good likelihood of margin expansion and faster earnings growth for companies. Even as top-line growth slows relative to FY23. Banks’ asset quality should remain strong and support the earnings growth outlook.
What is the investment strategy behind the launch of the HSBC Multi Cap Fund?
The HSBC Multi Cap Fund would be a blend of growth and value. While there would be growth-oriented stocks in the portfolio, especially in the large-cap and higher end of midcaps, there would also be a good mix of value-oriented stocks within mid- and small-caps which are expected to deliver alpha returns over time.
While investing in growth opportunities, a reasonable valuation would be preferred. The HSBC Multi Cap Fund will invest at least 25 percent into companies of each market cap, viz. large, mid and small cap, and carries flexibility up to 25 percent to go overweight within the market caps or invest in debt instruments or money market instruments.
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