Kunal Valia of Waterfield Advisors
The Union Budget 2023 should optimise and improve the quality of expenditure by allocating more funds towards capex spending and manufacturing. Further to counter the slowdown, rural spending will see enhancement, albeit at a lower pace (marginal cut in subsidy bill), according to Kunal Valia of Waterfield Advisors.
Valuation of Indian equities is at a premium by its own historical average. So the chief investment officer (Listed Investments) thinks that investors will have to build a case for another year of modest returns and take advantage of days with high volatility to build a long-term portfolio.
In an interview to Moneycontrol, Valia shares that IT companies as a pack still trade at a premium valuation. However, bottom-up stock selection will be at play in 2023 as IT continues to be a growth sector with high-quality companies with negligible debt in the books, says the ace finance professional with more than 21 years spent in Indian capital markets during which he served companies like Credit Suisse and DSP Merrill Lynch.
Do you think the slowing global growth, sluggish domestic economic recovery and political considerations ahead of 2024 Union election will influence the budget math for FY24?
The significant interest rate increases by the central banks across the globe should have a bearing on the global GDP. India could be one of the least affected economies however it is not immune. India’s GDP growth is likely to be higher compared to the largest economies however projected to be lower than in FY23. This is on account of the lower scope for fiscal expansion.
India’s fiscal deficit had scaled higher from 4.7 percent in FY20 to 9.2 percent in FY21 due to the pandemic however for FY24 it is likely to be in the range of 5.7-5.9 percent compared to 6.4 percent for FY23. This will lead to lower growth on the expenditure side.
However, the focus of the budget will be to optimise and improve the quality of expenditure by allocating more funds towards capex spending and manufacturing (new sectors might be identified for the PLI scheme, and the scheme might be extended to MSMEs and innovation. Further to counter the slowdown, rural spending will see enhancement albeit at a lower pace (marginal cut in subsidy bill).
All put together, despite fiscal constraints, public capex, infra, and rural spending will dominate the Budget FY24.
What are the top sectors that can be on FM radar while finalising Union Budget FY24?
Public capex, infra, and rural spending will dominate the Budget FY24.
Do you see a slowdown in discretionary consumption? If yes, then what should investors do with this space?
Discretionary spending in the middle- and low-income groups may see a likely slowdown due to
1) Higher interest rates will start impacting purchasing power (slowdown in real estate and durables) and reduction in savings relative to pandemic times.
2) Lower wage growth and employment opportunities
3) Global slowdown
Do you see a risk of de-rating in several high-growth and quality names in current year given the expected global growth slowdown?
High growth and high-quality companies have already witnessed price and/or time corrections since the start of FII selling in October 2021. We may continue to see volatility this year as well, till clarity emerges on the extent of future rate hikes based on the inflation path and how deep will be the slowdown. However, we see further correction as an investment opportunity for building a high-quality investment portfolio.
Do you still find PSU banks attractive even after a run-up in the past?
PSU banks have had a significant turnaround in terms of share price performance in 2022 and the same continues so far in 2023, however, one has to build a case for high-quality private sector names across sectors seeing a rebound once the FII selling switches off.
Combining growth and value strategies in the portfolio may turn out to be a more holistic form of investing in years to come compared to what we witnessed between 2015 and 2020 where growth and high-quality stocks outdid value-oriented stocks by a large margin.
Do you think the major rally in equity markets is unlikely in the first half of this calendar year?
Indian equities, despite modest returns in 2022, have outperformed their peers in the last 12 months. Largely developed market equities like the US, parts of Europe, and emerging markets have seen a drawdown of 15-20 percent in 2022.
Further valuation of Indian equities is at a premium by its own historical average. So investors will have to build a case for another year of modest returns and take advantage of days with high volatility to build a long-term portfolio.
Do you see a cut in tech spending by global firms, given the possibility of recession? Are you a buyer in the IT space or are you waiting for more correction?
Quite a number of companies in various sectors across the globe are cutting down their workforce. With regards to Indian IT stocks, correction in 2022 till date has been over 20 percent which has assisted in cooling off the frothy valuation.
However, IT companies as a pack still trade at a premium valuation, however, bottom-up stock selection will be at play in 2023 as IT continues to be a growth sector with high-quality companies with negligible debt in the books.
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