We will have a good 2023 in terms of economy and markets; top 3 holdings remain unchanged: Milind Karmarkar

“I have been talking about Titan and Trent for a very long period of time. We continue to be bullish on that. I revisit these themes and try and visit the stores once every two, three months. The kind of crowds which are there in these stores continue to reconfirm my thought process that these stocks will continue to do well. So, I continue to believe that stocks in retail are likely to do pretty well,” says Milind Karmarkar, Fund Manager, Dalal & Broacha Portfolio Managers

In 2022, whatever could go wrong has gone wrong – high inflation, extreme tightening by central bankers, a war. It has been such a topsy-turvy year. Are the decks getting cleared now for a solid 2023 because while India may have done very well in relative terms, for equity investors, 2022 has not been a year of great remembrance. Returns have been in single digits.
I agree with you that returns have been in single digits in many cases and negative as well because the smallcap index is still significantly low and most of the smaller investors obvious invested in smallcaps. So that is the worry but at the same time, in 2023, the outlook looks good though there was a bit of a scare with news about significant infection in China because of a new Covid variant.

But as things go by. it looks like that China is also getting back slowly to normal because whatever photographs and other things are coming from friends in China, they indicate that the lockouts have been removed and because of that slowly the overall life is getting to normal so I hope that this variant remains mild and it does not impact the global economy that much. So yes I am looking at a good 2023 going forward.

One of the most important moving part for 2022 was interest rates. Buffett has always said that interest rates act like gravity and as they go higher, markets come down. It is not that interest rates have reached alarming levels but the pace of interest rate hike is bothering markets, consumers and home loan buyers. Don’t you think it will have an impact on consumption and market valuations in the way equity as an asset class in a sense is going to move?
This December’s rate increases both by the Reserve Bank of India and Federal Bank indicate that they are slowing down the pace. They have not said that they will stop the rate hikes but it will continue for some time. Towards the second half of calendar 2023, I am sure that it will mean the rate hike will be paused and as that happens, we will see demand coming back.

In fact, demand is already back but interest rate hikes could get impacted and so the demand growth will be a bit slower but second half onwards, things will return to normal going ahead; For every rise, there will be a cut going forward, may not be immediately, may be in 2024 and that hope will drive the markets. We will have a good 2023 in terms of economy and markets.

There is a very thin line on what is value and what is growth but in 2022, the whole approach towards value made a comeback. Sasta, sundar, tikau (cheap, good and sustainable) businesses have made a comeback. What happens in 2023?
What happens typically is that most of the value stocks are in commodity or commodified products and as they get cheap, there will be buying and they will show some kind of an uptick. In fact, they can deliver good returns in the shorter term but longer term, I continue to believe that those businesses which have a very long growth path are likely to do pretty well. Let me put it this way, it is PE after considering growth over a longer period of time and as long as the businesses generate cash flow, those businesses will deliver over a longer period of time.

You have bought into PSU banks. Do you think the trend in PSU banks is a multiyear trend?
PSU banks will always remain a trade and over a longer period of time, private sector banks will do very well for the simple reason that they are more retail centric and though the capex cycle has started. corporate loan growth has also started. Over a longer period of time, corporates will probably borrow from the stock markets in debentures and bonds rather than going to the banks. The real growth in banking will come from retail, where private sector banks are very well established and that is the reason why I am saying that they will probably do better than the PSU banks over a longer term.

How do you see the entire consumer/consumer staple space moving? I am asking you this question based on two facts – there is time-wise correction in some of the consumer staple stocks and some of the famous brand companies like Asian Paints or Nestle with the exception of IT, are now going through a price wise and also time wise correction. Second, revenge shopping and that one time demand rerating which happened post Covid, is unlikely to sustain which means the effect and the slowdown will start in some of these categories?
Let me take you back to my favourite theme which is rising per capita income. Just as between 2003 and 2008 our per capita income went up by more than two times, I would not be surprised if this time also a similar thing happens.

So besides binge shopping, there will be additional money coming into consumption mainly because of the rising per capita income. As basic demands are satiated, the money will go into consumption and that will drive growth in these stocks. There will be bifurcation in the sense that some sectors within consumption will grow less and some segments will grow more and that is where one will have to take bets.

I continue to believe that retailing will do very well whether it is in the form of grocery or otherwise while as FMCG the growth will definitely be there but not as much as retail, that is what I believe.

Have your top three holdings from the beginning of the year changed and are you repositioning your top three or top five holdings for 2023?
No, they have not changed, they remain the same because I have always been focussing on consumption.

So consumption remains the main theme of our portfolio though we have added some industrials on the way and we will continue to hold them because I believe that the new capex cycle has started and going ahead, we will benefit because of the new capex cycle and that is why we have some industrials in our portfolio. We also have travel and tourism related stocks in the portfolio.

What are your top three holdings?
I have been talking about Titan and Trent for a very long period of time. We continue to be bullish on that. I revisit these themes and try and visit the stores once every two, three months. The kind of crowds which are there in these stores continue to reconfirm my thought process that these stocks will continue to do well. So yes, I continue to believe that stocks in retail are likely to do pretty well.

You track the Tata Group very closely. That group has seen massive rerating – be it Tata Technology or a Tata retail company or a Tata IT company. They are now commanding best PE multiples at least in the sector. Is that the one time rerating under Chandra’s leadership? From a market standpoint, is that over now?
I do not know because if you look at the US, which according to me is a benchmark for any democracy and which is getting into a large growth path, you will see that most of the large corporates in the United States are those where there is a clear distinction between ownership and business. That is what Tatas have done. They have always had professional business leaders and the ownership has remained separate.

I think that is one of the reasons why I believe that Tata Group will continue to grow the way it has so I do not see any rerating adjustment in the Tata Group shares and I think the rerating will be justified by the growth which they show.