ETMarkets Smart Talk: These 4 factors will decide the trajectory of markets in 2023: Dr. Joseph Thomas

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“In response to certain global developments like the US Fed statements and the new data points, the market could see some corrective downward movements too though may not be very significant,” says Dr. Joseph Thomas, Head of Research, Emkay Wealth Management.

In an interview with ETMarkets, Thomas, said: “From the Emkay Wealth perspective, the two sectors that we have been recommending to investors to look at have been BFSI and Technology” 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 indices are likely to consolidate at higher ranges but need not necessarily be at peak levels. This is because the broader market is yet to catch up with the frontline indexes.

However, in response to certain global developments like the US Fed statements and the new data points, the market could see some corrective downward movements too though may not be very significant.

3 or 4 factors that we need to take cognizance of in understanding the trajectory markets are – a) the Fed Policy and the RBI policy – is there going to be sustained moderation in the quantum of rate hikes? This is mostly data-dependent.

Any signal of moderation in the policy approach through a smaller quantitative measure would encourage the markets to pick up positive signals.

  • The second factor is stability in exchange rates. Unless exchange rates stabilise, we may not be able to see fund inflows into India.

  • Third, the developments in and around China, both political and economic.

  • and finally, the state of government finances and the proposals in the Union Budget.

Gold outperformed equities so far in the year 2022 compared to 4% fall seen in the previous year. Do you see the trend to continue in 2023?
Gold may outperform equities in some sporadic time periods or select years. Last one- year return from gold is approximately 5%. Equities performance, given the fact that it was not a good year as such, was at almost the same levels.

But, gold cannot consistently outperform equities due to the nature of the asset class itself. With global inflation touching phenomenal levels in the US (8.50%), Europe (10%), and India (7.50%), it was expected that gold would do well. But that did not happen.

The focus was on the rising interest rates in the US and the Fed’s continuous hawkish stance which helped the currency yield inch higher.

This rendered gold a bit irrelevant for an active share in the portfolio. However, with inflation likely to moderate from hereon and the central bank policies also turning less hawkish, gold prices could try testing the upside in the coming months. This may help gold price to recover to some extent.

But there should be greater certainty about the policy stance, and also some confirmation about the slowdown in economic growth.

It is interesting to note that global central bank purchases of gold is happening and that may give some support to gold prices. The Sovereign Gold Bonds is a good avenue to look at for investment from a longer-term perspective.

RBI raises rates by 35 bps in the December meeting. What is the trajectory you see for the year 2023?

The latest CPI number is at 5.88%. This is very close to the RBI ceiling of 6 %. But this does not offer any comfort at this juncture. The core inflation is at 6.28%.

We need to wait and see whether inflation persistence on account of higher fuel prices is going to have its sway in the coming days due to a lesser supply of Russian oil, stronger than expected winter and the holiday season, etc.

The recent rate hike by the RBI was just 35 bps, smaller than what it was on the last two occasions. If inflation remains under control, the quantum of rate hikes may moderate, and we may see another 25-bps hike in the next policy.

There is a higher probability that the policy rate may peak at around the 6.50 % level. But more than the policy rate, market rates do matter, because with credit growth at 17.20 % there is likely to be a scramble for funds in the coming months.

There is still some amount of both central and state government borrowings to hit the markets, about 25%. The state of government finances and the government borrowing program will be known from the budget.

These factors also may have an impact on the market yields. Short-end rates will continue to be under pressure.

Which sectors are likely to remain in limelight in the year 2023 and why?

From the Emkay Wealth perspective, the two sectors that we have been recommending to investors to look at have been BFSI and Technology.

BFSI is likely to gain more traction due to the improved general health of the sector itself and the robust demand in the economy as also the pick-up in credit.

There has been a lag in the response of the sector in the last two years, and it is likely to see a good pick up in momentum. Technology has seen quite a substantial correction of more than 30% and the sector looks particularly attractive.

The Nifty IT is at 29000 from the peak of 49000 level. That the more prominent companies in the sector have seen many cycles and still have emerged unscathed is a positive factor to reckon with while taking a call for long-term investments. Investments could be done through fairly well-diversified funds from the mutual funds space.

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?
The PSU banks offered good value for a long time, and they did not move much either way, and was not picked up too much because at least some might have had fears of an impending value trap.

But the smarter guys sensed the opportunity that they offered in terms of better health and clean balance sheets and improving business.

And the rally came in a manner much stronger than expected. But there is no reason to feel having missed the rally.

There is more room for expansion of market capitalization as business performance improves in the coming quarters.

Oil prices have cooled off recently. How will that play out on the earnings of India Inc. as well as markets?

Only a sustained fall in oil prices will benefit both consumers and producers. Oil prices have been very volatile ranging from US$ 80 to US$ 100 for almost a year now.

Recently it moved down to sub-80 level. The falling crude prices are expected to benefit sectors like paints, petrochemicals, textiles, aviation, tyres, and cement.

While the benefits will gradually get reflected in the bottom line of companies the same will be discounted by the markets faster.

But the windfall taxes imposed by the government to tax extraordinary gains has been a dampener which again has been further rationalized by the government in recent weeks.

FIIs are back with positive flows in the Indian market in the last one month. Do you see a reversal of flows (more money coming in) in 2023?

We cannot rely on just one month of inflows to evaluate the trend in FII inflows. As far as outflows go the flows may not be as intense as it has been during this year.

Sustained inflows can happen only if there is more certainty about the policy stance of the Fed and the RBI. Also, we should see a stable domestic currency.

If these two factors are positive, then inflows will happen. Otherwise, the FIIs coming back into the domestic markets may get prolonged further.

How is India placed compared to global peers in terms of valuation?
Indian markets look pretty expensive on a relative basis but if one looks at the rate of economic growth India stands ahead of the rest of the world.

Growth in India is at 6.50 % to 7 %, far ahead of China which is at 3.50% to 4%, and US and Europe somewhere between 2.50% to 3%.

This may hold the key to better earnings in the coming year or two, and better price performance on the markets.

However, we need to be cognizant of the fact that the manufacturing output contracted by -5.60 % in Oct,22, and the IIP number is at -4 % for the same month.

Any 3-5 learnings for retail investors from the year 2022 which they can use in 2023?

Invest in a phased or graduated fashion to get optimum returns on the funds deployed. Sectoral and stock rotation at much shorter intervals today compared to what it was a decade back is a reality.

Do portfolio reviews at quarterly intervals with the help of professionals and also consider profit booking at definite intervals. Trust investment managers who have a sufficient track record in the trade.

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


Authore – Abhi bhardwaj

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