2023 to be a listless year with not substantial gains and a lot of volatility: Maneesh Dangi

For the risk allocators, world is a great place today, lots of great opportunities available but amongst the popular one you could, of course, look at US tech or US markets in general.

So unlike last one year that we have struggled just with cash since we began to talk towards the end of 2021 that cash was the best allocation that too US dollar. There are many more opportunities today to rebalance your portfolio away from home buyers which is primarily invested only in India to perhaps US and rebalance in favour of fixed income because that yields you good 8-9% and there if you wish we can discuss credit where the opportunities are plenty for earning 10-11%.

So for somebody who says look I want to stay in India sare jahan se achha Hindustan hamara, I do not want to go out, can I say that buying a good corporate debt fund is the best idea?
True. It depends on your tax, what is the tax rate applicable for your income. If you are not in the tax catchment area, even fixed deposit will do fine. Some of the small finance banks are offering you 9% and some NCDs of course are available in the market at 10 which are AA rated. Otherwise, if you are in higher tax bracket, the short-term funds and corporate bond funds are awesomely placed, yielding you near 8% and there is a reasonable chance that you will get some capital gains during your investments for two, two-and-a-half years or three years. So your total yield may end up being actually better than this. So you are right corporate bond fund or short-term bond funds actually make sense.

Bonds do well when interest rates move lower. Interest rates move lower when inflation has peaked out and when demand or recession is round the corner. So your call to buy long bond is it also an indication that it will be a bad year for equities and a bad year for global growth?
I think valuations from a historic standpoint are relatively better placed both in India as well as US. Of course, US is relatively cheaper to its own history but bear in mind that interest rates have actually risen really substantially in US and to that extent the equity risk premia in US also is relative to its own history is pretty low.

In India’s case our argument has always and always been that India’s market for last one year or rather 15-16 months has never been cheap enough. While the PEs are lower but because yields have risen pretty significantly, the equity risk premia is actually lower than what it was a year ago.

So to that extent it is still not a setup in which an outright significant selloff can happen because markets are only 5-10%, 15% more expensive but they are not cheap to go overweight on. So to that extent even this year is going to be a listless year with not substantial gains and a lot of volatility.

So as a traditional Indian investor what do you do I mean do you go back to the drawing board, back to the basics invest money in FDs?
The traditional Indian investor is only a fixed deposit investor and he can walk up to the neighbourhood bank and invest his money direct for one or two years at 8-8.5% and even 9% at some instances which is the point that we all have to sort of appreciate that this big boom in retail investing in equities in India in some form came directly to the markets.

If you remember it will be good if you actually educate investors right now that what really happened during FY19 vis-à-vis FY18. In FY19 when interest rates went up, the flows in mutual funds and retail actually dried up significantly because the reflex of an HNI or Indian investor would actually change once he begins to cite 8-9% returns in fixed deposit or fixed income itself. To that extent there is another weak link to equity in terms of flows more specifically the mutual fund and retail flows that very traditional investors who were flocking to you in equity markets for last one and a half-two years would have an alternative and therefore will move there. So they are going to precisely do what they did in FY19 which is to actually dial up fixed deposit or interest rates. Some form of interest rates, be it mutual fund fixed deposit, corporate fixed deposit and so on so forth.

That is a very interesting observation that you have made that they are just so elastic and sensitive to which way the interest rates are headed but in that scenario then do you also up your allocations into MFs purely because this is going to be a linear for equities?
In mutual fund also there are so many of them and I would actually caution the investors yet again as I did throughout last one year to be careful of small cap and midcaps because that asset class has two big challenges. One is of course to do with the fundamental factors. Tight liquidity takes a zing of small caps, access to capital for them actually gets restricted in such regime and when the nominal GDP growth falls from 18, 19, 20% that also takes the pricing power off.

So that is a fundamental argument but given that we are talking of here of mutual fund flows it is important to recognise that a lot of money has flown into small and midcap funds.

Almost every month the midcaps, small cap funds are actually inflating by 1-1.5% because of incremental flows as returns have been reasonably good for last three years.

My worry is that a lot of local money would actually shift to rates but that money otherwise would have actually gone a lot more to small and midcap funds and that is another dryer or stress for what you call it for small and midcap.

Large caps contrary to what is the popular perception in India right now would actually end up relatively doing better than small and midcaps.

So for your asset allocation for mutual funds, try to focus if you are a pure mutual fund investor on diversified and large cap funds or index funds.

What could go right and what could go wrong we have spoken about risk, we have spoken about asset allocation, we have spoken about what should be the strategy now let us understand the thoughts behind what you have put out. The macro trends on one side there is inflation which could peak out, on the other side there is recession which could be deeper than what we are anticipating what play book will be at play according to you?
I remember in April 2020 when we had a chat on why to dial Indian equity we had said that there will be reflation trade throughout next one and a half year. We argued too many pessimist then that reflation is when a lot of support from RBI, Fed, ECBs and fiscal authorities actually drive up asset prices.

To actually pull the economy out of the stress a lot of money and spending is actually done by government and policymakers. Then reflation trade actually started to enter in restrictive territories when we started to cite in September-October 2021 that there was a miscalculation on part of central bankers that this inflation was transient.

We argued that inflation would sustain at higher levels and thereby came a sudden stop. So the whole of last one year while in India we have done reasonably well but last one year the zing is of asset markets because extremely restrictive policies were applied.

At least last 10 years of policy making has been that the central bankers quickly actually unwind tightening, cut rates and even fiscal authorities to that extent actually respond.

That reflex is going to be missing this year because the scars of relatively elevated inflation are so deep that Fed and many other central bankers would very likely stay with higher rates for longer. So this reflex of let us cut rates quickly because economy is slowing is going to be missing and that is the subtleties which is going to be actually bothering equity markets or long assets throughout 2023 and which is why VIX will stay relatively more elevated.

Volatility will continue to stay high until we have confident central bankers actually saying that look slowdown is deep enough and inflation is in our catchment area to the extent that now we can actually lower yields and that is a time when in aggregate terms including in India it will be a time to dial up equities.

I hope and I think that will happen at some point in time 2023 so that is the sort of playbook to watch for over next 12 months.

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