ETMarkets Smart Talk: Amid rise in interest rates, banks are an excellent pick for an earnings upgrade in 2023: Sonam Srivastava

In an interview with ETMarkets, Srivastava said: “Domestic capital goods and manufacturing are still seeing upgrades as the Capex cycle remains robust, and they continue to benefit from PLI schemes. We could see good numbers there as well,” Edited excerpts:

As we enter the last month of December, we are seeing some consolidation at higher levels. What is your view on the market for the year 2023?
The market is entering December with a consolidation. There are rising fears of a recession in the US and concerns about the overvaluation of Indian equities compared to emerging markets.

But still, I have a positive outlook for the Indian market as India still has the highest projections globally in terms of growth which justifies the high valuation we demand.

The Nifty deserves to command a high multiple for several reasons – India becoming an alternate manufacturing destination for the world, India leading in the public digital and financial infrastructure space, domestic focus on job-creation and ease of doing business.

The RBI expects India’s growth to be 7% next year, and the world bank looks at 6.9% growth which is among the highest in the world.

In 2023, while the Indian markets might get dented by the global recession, they will not drown.

Gold outperformed equities so far in the year 2022 compared to 4% fall seen in the previous year. Do you see the trend continuing in 2023?
Gold is acting like a safe haven among the volatility in the global markets. The lag effect of aggressive monetary tightening by the key central banks is likely to lead to a slowdown in the global economy, and the looming worries will entice the safe-haven demand for gold and this trend might continue in 2023. The technicals also remain quite strong for the precious metal.

RBI raised rates by 35 bps in the December meeting. What is the trajectory you see for the year 2023?
The RBI did not give a clear idea about the trajectory that they might follow. The hawkish commentary focused on reining inflation, fighting global slowdown hints, and sustained action to hike rates.
But on the other hand, the RBI acknowledged that the projected growth rates need to be cut down, and the growth outlook looks bleaker. In such a scenario, hiking rates will be a tough decision that might be highly scrutinised.

We cannot rule out the possibility of a rate hike in 2023 but it will be an extremely difficult decision by the central banks if the growth starts to dwindle.

Which sectors are likely to remain in limelight in the year 2023 and why?
The Indian economy coming out of the pandemic will remain resilient. As inflation eases, many sectors will remain buoyant, especially domestic consumption, travel, and hospitality.

Banks have come up strong with rising credit growth and much more robust balance sheets, and they will flourish in a rising interest rate environment.

In a growing economy, we import more, but the exports will suffer as global growth slows down, and this will cause concerns.

In a worldwide recessionary environment, sectors whose earnings are linked more to the global market, like Pharma and IT, will be impacted and see downgrades.

A lot of PSU banks are picking traction but is it FOMO that is now playing in the market because most investors as well as institutional had very limited exposure?
That is an interesting way to look at it. There is definitely a bit of FOMO with PSU Banks given the exceptional numbers that they have shown in an otherwise weak market.

But in a rising interest rate environment in India where Capex is still going strong, PSU Banks which are the economy’s first source of credit might still continue to flourish into the next year. The buying which is happening despite the highs might in fact be strategic.

Oil prices have cooled off recently. How will that play out on the earnings of India Inc. as well as markets?
Crude oil prices at the levels of 60-70 might be the most optimal for the Indian economy. The OMCs will see a positive impact as the losses due to the price cap on Diesel will be cut, even though the expensive inventory might lead to some losses.

For the other sectors that consume oil – FMCG, Autos, Cement, etc the cooling off of Oil Prices is good news as it helps them expand their margins.

Where is smart money moving? Where to find value in this market?
Banks are an excellent pick for an earnings upgrade in a rising interest rate environment even though the Bank Nifty is, in fact, the most heated sectoral index at the current junction.

Domestic consumption will continue to be robust even if global growth slows down, and in a lower inflationary environment, the margins will expand and could see upgrades.

In addition, domestic capital goods and manufacturing are still seeing upgrades as the Capex cycle remains robust, and they continue to benefit from PLI schemes. We could see good numbers there as well.

Debt has increasingly started looking attractive as interest rates have risen. The long-duration rates might have little demand as the rates will not be this high for too long, but the short to medium-duration debt is quite attractive.

FIIs are back with positive flows in the Indian market in the last one month. Do you see a reversal of flows in 2023?
FIIs will bet on emerging markets which are a value pick in a recessionary environment, and India will be the beneficiary of that flow.

On a country level as well, India will continue to command strong valuation and demand due to its robust growth projections, expanding manufacturing and digital capabilities, and robust consumer demand.

How is India placed compared to global peers in terms of valuation?
Our market has been the most robust over the last year and is at a much higher valuation multiple than many emerging markets. For example, the valuation ratio for the Nifty is running at a 134% premium.

But we are not in the overheated zone if you look at the PE ratio compared to historical values. The US Fed has been very aggressive in its fight against inflation by hiking interest rates.

However, they would compromise on growth in the economy for inflation. As the inflation in the US has cooled slightly but is still nowhere near the target rates, the rate hikes continue and be a concern for growth.

Any 3-5 learnings for retail investors from the year 2022 which they can use in 2023?
The big lessons for retail investors in 2022 were to –

– focus on the long term to make the most out of the market

– be dynamic in your approach as the market changes phases

– SIPs are the best ways to handle volatility for an investor

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)