FY23 was the glory year for banking – growth bounced back, and bad debt provisions fell off a cliff, said Seshadri Sen of Alchemy Capital Management
“Some simplification of capital gains tax (CGT) is warranted, given the complexity of the current system. For example, the taxation across all equity categories (listed, unlisted, overseas) should be broadly similar,” Seshadri Sen of Alchemy Capital Management told Moneycontrol in an interview.
However, one risk is that if the effective rate of equities CGT goes up, it would have a sharply negative effect on the market, he feels.
The Head of Research with more than 25 years of experience in Indian market, believes tech stocks look attractive from a medium-term perspective (more than one year). The stocks have underperformed in CY22 and this has stripped the froth off the valuations.
Growth has largely held up – while it could slow somewhat in CY23, it would not be significantly worse than long-term trend rates, Seshadri says. Edited excerpts from the interview:
Do you think the Federal Reserve will go for the last rate hike in February and then take a pause?
We believe the Fed’s tightening cycle will end in 1HCY23, given the weakening impulses on inflation that are visible across many variables. The exact time is difficult to pinpoint as there are a few moving parts – for example, we think the opening up of China’s economy could create some inflation uncertainty in the short term.
Also Read: US Fed unlikely to hit pause in 2023 but pace of rate hike to slow down
Do you see any possibility of the US economy slowing down at a fast pace?
Our base case assumption is that the US experiences a soft landing. Growth will slow through CY23 and, at worst, result in a mild recession lasting 1-2 quarters. Two factors contribute to this assumption. First, corporate and household balance sheets were robust, going into this cycle. This limits the damage caused by monetary tightening.
Second, the current inflationary cycle was led by many external factors beyond excess demand: Covid-led supply bottlenecks, the Ukraine war, and the China lockdown. As these get slowly resolved, inflationary pressures could ease before the full impact of the Fed’s tightening is felt on demand and, consequently, growth and employment.
If, however, the recession gets deeper, this could see a sharp market selloff as earnings and valuations get beaten down at the same. Such a correction would be short-lived as central banks would step in very quickly.
Do you think the technology stocks need correction for attractive valuations or are these stocks already at attractive level?
Tech stocks look attractive from a medium-term perspective (more than one year). The stocks have underperformed in CY22 and this has stripped the froth off the valuations. Growth has largely held up – while it could slow somewhat in CY23, it would not be significantly worse than long-term trend rates.
On the other hand, margins should start to recover as the worst of wage cost pressures seem to be done. These are some of the most high-quality stocks in India, with strong return ratios, healthy cash generation and a long runway of double-digit top-line growth.
Do you expect some normalisation of India’s valuations in coming months?
“Normal” valuations for the Nifty are tough to figure out, given the changing composition of the index and structural profitability changes in many companies. We do, however, believe that valuations for the headline Nifty could “time-correct” in the short term. That, however, does not change our positive outlook for the market in the medium term – the Bloomberg consensus estimate for FY24 EPS growth is 17 percent and the index could absorb a small derating and still deliver a healthy return. We continue to hunt for ideas where earnings growth is resilient.
Do you see any kind of simplification of capital gains taxation in Union Budget 2023?
Some simplification of Capital Gains Tax (CGT) is warranted, given the complexity of the current system. For example, the taxation across all equity categories (listed, unlisted, overseas) should be broadly similar.
One risk, however, is that if the effective rate of equities CGT goes up, it would have a sharply negative effect on the market. It would also hurt the private investment cycle, which is still at its nascent stage – investors will have to factor in higher hurdle rates for new projects.
As a Finance Minister, what would be one thing that you will have focus on in the Budget?
This government has taken steps to improve the quality of government spending – moving away from consumption and subsidies to capital spending. The government should stay on this path and continue to process over many years – it could result in sharp productivity improvements and raise the potential growth of the economy.
Do you think the Budget 2023 will be a non-event for the market?
The impact of the budget has weakened over the years. There may be some short-term effects from CGT changes, but we do not expect any significant change in the trajectory of the markets after Budget 2023.
Stock prices are discounting the strong long term positive trends in the economy – sustained growth, recovery in manufacturing and the effects of digitisation. None of these are affected by the budget.
Do you expect robust earnings from the banking space?
FY23 was the glory year for banking – growth bounced back, and bad debt provisions fell off a cliff. As we enter FY24, growth will moderate, margins could get slightly pressured from rising deposit costs and there is no credit cost benefit left to harvest.
Earnings momentum will consequently slow down from FY23 levels. However, EPS expansion would still be around long-term trend levels and ROAs (return on assets) should remain healthy.
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