recession: More headwinds? Recession before rebound main theme for CY23: Trideep Bhattacharya
What do you expect in terms of the earning season? What do you think markets are trying to factor in when we see the February and March falls and what essentially has happened in April so far?
I would say our expectation or the theme for calendar year 2023 (CY23) is recession before rebound. Our expectation is that in the first six to nine months of this year, we would see recessionary conditions globally including in India. That is slowing growth rates. The central bank is trying to tame inflation and to various degrees in different geographies which will materialise in some form of slowdown as we go ahead. Eventually, the economy is bottoming out towards the second half of this year.
The first half of our expectation is pretty much playing as per script where globally we have seen growth rates coming off. The central banks are trying to control inflation by raising interest rates on one hand but at the same time stop any accidents to happen in the form of banks etc. We are standing right in front of the result season where we would expect to see some sort of slowdown in terms of global facing sectors for sure that is where we are right now.
Somewhere around, as we head along towards the middle of this year, towards the back half of this year, we would see the slowdown materialise in some form and respect, and then gradually economies will bottom out over a period of time. The sweet time for investments or from a return point of view would lie after that. At the moment, it is probably the time where we are facing headwinds rather than tailwinds.
In terms of market valuation, how should one look at it? For example, the IT sector numbers are not looking that great. The management is not particularly that optimistic but valuations are still 20-25% higher than the pre-Covid level for the sector. How should we look at either that sector or probably Nifty in terms of valuation?
To start with, the valuations of Nifty one year forward are roughly about 18 times. If you compare that with our own history, you will find that we are broadly in plus or minus 5% around the average. So in other words, our valuations versus our own average over the history is kind of in line.
However, if you compare us with the region or globally, the disparity is quite high. We would probably appear a lot more expensive though this extent of being expensive has corrected over the last three-four months but we will probably be still on the expensive side.
Our headwind for FII flows or from a market standpoint is this relative valuation relative to globally, as opposed to our own absolute valuations related to our own history from a broader market standpoint. The IT sector is a case in point where valuations are probably thereabouts.The key issue is the right calibration of the earnings estimates for FY24 versus what the demand scenario might look like and in that context, TCS presented their own views yesterday and we will hear from Infosys today evening. But that is the calibration which is happening as we speak. Once that comes through, the sector would become a lot more palatable or investible.
Would you look at banks, NBFC? How would you rate banks? What do you think is giving you more comfort now considering that some of them have given their Q4 updates?
Banks, from a slightly longer-term perspective, are in a bit of a sweet spot. When I say banks, I mean, lending financials. The reason I say so is if you look at where they stand today relative to where they come from over the last three-four years, you will notice that they have gone through a large NPA cycle which is now reversing.
Secondly, credit growth in the economy has picked up and is reasonably strong which is usually a tailwind for banks, for lending financials overall and generally rates have been on the way up which is positive for their margins. This, as a concoction from a fundamental standpoint, is a good place to be from a lending financial standpoint.
Valuations are also reasonable as compared to many other sectors which have got tailwinds. So, on net balance, to cut the long story short, we would be positive on lending financials at this stage of the cycle from an economic point of view and we are certainly in our portfolios overweight this sector.
