ETMarkets Smart Talk: Cement, Construction & Infra, Speciality Chemicals among top sectors to bet on in 2023: Kedar Kadam

“We expect Cement, Construction & Infra, and Speciality Chemicals to hog the limelight. However, IT and Pharma can prove to be more resilient and can be considered as Contra exposure in the portfolio,” says Kedar Kadam, Director – Listed Investments, Waterfield Advisors.

In an interview with ETMarkets, Kadam, said: “We expect the earnings growth trajectory of corporate India to moderate in 2023. The current consensus estimates look optimistic, and we see the potential for more downgrades than upgrades” Edited excerpts:

As we into the last month of the year 2022 – we have reclaimed all-time highs. Where do you see markets headed in 2023?
The CY-22 has been a bumpy year for global equity markets; however, the most noticeable part was the outperformance showcased by domestic equity markets.

On a year-to-date (YTD) basis, the Nifty50 is up by ~5% while the MSCI EM index is down by ~25%. This outperformance of the Indian equity market has widened the valuation gap between India and other emerging markets, making the latter more attractive.

We do not expect Indian equities outperformance to continue given the worsening global economic outlook, monetary tightening, higher input costs & rising finance costs for the corporates.

The Indian equity markets are currently trading at 12m fwd. earnings multiple of ~22x compared to 11.7x for the MSCI emerging markets index (premium of nearly 100%).

We remain optimistic about long-term growth prospects of India, however, do not see risk-reward favourable for fresh investments at current levels.

Our cautious stance on markets is driven by -

A) Premium valuation compared to peers indicates little room for multiple expansion
B) Earnings revisions have turned negative and are likely to deteriorate into 2H’FY23 as base effects become more challenging
C) demand trends around the recent festive season indicated mix trends, high inflation (6.77%) is eating into people’s disposable incomes
D) Domestic interest rates are going up, RBI has rapidly withdrawn liquidity and the trend in FX reserves remains volatile
E) Fiscal expansion which supported the economy through COVID-19, is unlikely to be available amid the need to control rising fiscal deficit.

Given this backdrop, the investors will need to be realistic about return expectations and need to think harder about diversification and portfolio resilience in CY’23.

The year 2022 was full of volatility and global events which impacted the Indian markets. Will the headwinds of 2022 continue to haunt equity markets in 2023 as well?
During CY'22 despite volatility and a series of negative global events, Indian markets showcased strong resilience and outperformance.

For FY’23 the key tracking variables will be Inflation & Interest rates trajectory, Global economic and geopolitical developments, pace of domestic economic recovery and FII inflows.

India’s relative performance to EM (and EM’s relative performance to DM) has tended to move with GDP & corporate earnings growth differentials. However, recent earnings and economic forecasts indicate moderation in both factors in CY’23.

India’s relative attractiveness over the medium to long term, among other factors, will depend on the manufacturing sector becoming a key driver of growth (PLI and China+1), and private sector investment cycle revival driven by manufacturing sector growth.

As the broader market valuations are rich, opportunities arising from market correction can be used to add quality stocks (with attractive valuations) from a long-term investment perspective.

Which sectors are likely to hog the limelight in 2023?
We expect Cement, Construction & Infra, Speciality Chemicals to hog the limelight. However, IT and Pharma can prove to be more resilient and can be considered as Contra exposure in the portfolio.

Rate continued to rise in 2022 – do you see further rate hikes in the year 2023?
The inflation at 6.77% remains well above RBI’s comfort level besides globally the interest rates continue to go up. We expect interest rates to rise in 2023. In our view, inflation and interest will stay higher for longer.

Amid rate hikes, global headwinds, and slowdown concerns -- how should one pick stocks in 2023?
2023 is likely to be a 2-speed year where markets expect a pivot from global central banks on the assumption of immaculate disinflation.

We believe though we are past the peak inflation rates, bringing down inflation to the target rate will require interest rates to stay higher for longer.

We expect a re-setting of equity risk premium and re-adjustment to a higher cost of capital. It will be more of a bottom-up stock picking whereas the market as a whole will see re-adjustments to the new normal.

In our view 2023 will test investor’s patience and ability to be in the right stocks, it will be a stock picker’s market. Investors should focus on companies with high earnings visibility, strong balance sheets, economies of scale and focus on the domestic economy.

How are earnings likely to pan out in 2023?
We expect the earnings growth trajectory of corporate India to moderate in 2023. The current consensus estimates look optimistic, and we see the potential for more downgrades than upgrades. We see rising risks to earnings coming from rising risk to earnings from-

1) weak global macro conditions
2) volatile commodity prices
3) rising cost of capital
4) high inflation
5) delayed recovery in rural demand,
6) earnings revisions have turned negative and are likely to deteriorate further into 2HFY23 (Consensus Nifty-50 EPS estimates for FY’23 declined by ~3% in last 4 weeks).

We expect net profit growth across sectors and companies to be uneven.

According to two depositories, NSDL and CDSL, the total number of demat accounts is 9.28 crore as on April 30, 2022. This number is almost three times the number recorded as of March 2020. What is the kind of growth you foresee for retail investors in 2023?
Indian households despite the recent surge in financialization of Savings still continue to be under-exposed to Equities as an asset class. We continue to expect more participation from retail investors in equity markets.

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