After a tumultuous 2022, global equity markets may be heading towards an equally volatile 2023. Against this backdrop, SACHIN SHAH, fund manager at Emkay Investment Managers tells Nikita Vashisht in an interview that Indian stock markets’ trajectory in the new year will depend upon domestic growth, and impact of sharp rise in interest rates on inflation. Edited excerpts:
What’s your outlook for equity markets in 2023?
Global headwinds of calendar year 2022 (CY22) — geo-political tensions, and high energy and commodity prices — are expected to continue in CY23. Therefore, the outlook for Indian equity markets for CY23 will be dependent on the actual growth in the domestic economy.
However, after a strong rebound over the last two years, the pace of growth may be slightly lower in CY23 as pent-up demand wanes, and as the high base of the current year kicks in from next year.
PODCAST: Is the Indian stock market losing steam?
Can the large-caps outrun their mid-and small-cap peers in 2023?
Over the last three years, mid & small-caps have outperformed the large-caps as the broader markets caught up with their underperformance of CY 2018, 2019, and early 2020. Therefore, from here on, we believe it will be a bottoms-up approach, and markets will reward companies that will be able to deliver quality growth over the next two years.
Will geopolitics be the biggest worry for investors next year as well? What could be the other key risks?
The biggest worry from geo-political challenges for equity markets is its repercussions on inflation. Fortunately, the worst of inflation seems to be behind us with most of the commodity prices cooling-off by at least 25-30 per cent, and below the average prices of CY21. The only last man standing is crude oil price, which is still out of the comfort zone for most of the importing economies, including India.
We, therefore, believe more than the geo-political challenges, crude oil prices, growth momentum across sectors in the domestic economy, and foreign exchange rates will be the key variables to be monitored in CY23.
With the US economy holding up well, do you think the worst may be over for IT stocks? Are they a good contrarian bet for the next year?
It’s too early to say that the US economy is holding up well. The litmus test of the impact of a sharp rise in interest rates, and high inflation will be seen in the first half of CY23 (H1CY23), and probably beyond. In fact, most of the large US corporations are bracing for a major slowdown in revenue growth in CY23.
Nevertheless, most of the large-cap Indian IT service companies are available at very reasonable valuations, with order book, and revenue visibility looking quite decent. We have also witnessed higher outsourcing in the past, whenever there were cost-cutting initiatives in US Inc.
What are your overweight and underweight sectors as we head into 2023? Will cyclical stocks maintain their edge?
We continue to own large private sector banks like ICICI Bank, HDFC Bank, Axis Bank, and Federal Bank. We are also optimistic about the CRAMS (contract research, and manufacturing services) business for the next few years, and have exposure to Divis Lab and Laurus Labs. We also like Sun Pharma for its US specialty business, and market leadership in the domestic formulations business. Some of our other holdings in large caps are Infosys, and HCL Tech.
From the mid- and small-cap segment, we like Sundram Fasteners, Apar Industries, Mahindra Holidays, and Blue Dart.
What has been your approach for the past few months, and do you see any reason to change/alter this going ahead?
We believe the key reasons for the outperformance of our portfolios boil down to diligently following our processes: upholding razor-sharp focus on Quality, and Discipline of Purchase Price and Focused Portfolio of 20- 25 stocks. At the same time, avoiding concentration risk by adhering to individual stock and sector allocation helps in delivering benchmark beating returns.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
