ETMarkets Fund Manager Talk: This money manager is positive on 3Cs- Credit, Consumer and Capex

“We are positive on three Cs- Credit, Consumer and Capex. We believe Banks are well placed and will continue to perform well on the bank of rising NIM, good asset book and strong credit growth,” says Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund.

In an interview with ETMarkets, Soni who is a seasoned asset management professional with a rich experience of over 25 years, said: “From a valuation standpoint, markets are not cheap anymore. We are trading at ~19x 2024 EPS, which is a slight premium to our avg P/E for the last 10 years” Edited excerpts:

We are in the last month of the year 2022 – we have reclaimed all-time highs. Where do you see markets headed in 2023?
The Indian economy and markets have shown remarkable resilience on the back of strong domestic demand. High-frequency indicators like GST collections, energy consumption, toll, and tax collections continue to indicate robust growth in the underlying economy.

In addition to the continued consumer demand, we are also seeing a revival in CAPEX. Credit growth is now at the highest level in the last decade at 18 India is one of the fastest-growing major economies in the current year and is likely to remain an island of growth in a world facing recessionary fears in the coming year.

The Nifty EPS growth continues to be healthy at low teens level on the back of strong growth in domestic sectors such as autos, capital goods, telecom, and banking.

As the commodity pressure abates, we will see improving profitability in user industries.

From a valuation standpoint, markets are not cheap anymore. We are trading at ~19x 2024 EPS, which is a slight premium to our avg P/E for the last 10 years.

Overall prospects for the Indian market are good. The year 2022 has seen low absolute returns, but high relative outperformance to global markets. Over the next 2-3 years, we expect the absolute returns to be healthy too.

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?
Indeed, the year 2022 had more than its fair share of macro headwinds- Russia-Ukraine conflict, a spike in commodity prices, the highest inflation in many decades and aggressive rate hike by central banks, currency weakness, etc.

As we look at 2023, Global economic growth rates are being toned down by both the IMF and OECD. Slowing global growth negatively impacts our exports.

Slowing exports and further hikes in US interest rates are a headwind for India. On the other hand, falling commodity prices augur well for India.

Steel prices have declined by 40% over the last six months and oil prices have come down by 30% from the recent peak. India is the third largest importer of oil and further moderation in oil prices in the wake of slowing global growth can benefit India.

On balance, we believe the macro setup and global environment going into 2023 is better for India. Of course, we will have to remain watchful of any escalation on the geo-political front.

Amid rate hikes, global headwinds, and slowdown concerns, which sectors are likely to hog the limelight in 2023?
We are positive on three Cs- Credit, Consumer, and Capex. We believe Banks are well placed and will continue to perform well on the bank of rising NIM, good asset book and strong credit growth. Consumer discretionary and auto continue to see strong demand and a fall in commodities is expected to be positive.

Finally, we expect both corporate and govt CAPEX to pick up and Capital goods and sectors like Cement could do well.

Rate continued to rise in 2022 – do you see further rate hikes in the year 2023?
While the inflation remains above RBI’s target range, we are past the peak inflation. Going into 2023, we expect some moderation in commodity prices.

This coupled with the base effect of the current year, will lead to CPI coming down to 5-5.5% by mid-2023. We think the future rate hikes will be smaller, and the policy rates can peak at around 6.50% sometime in the early part of next year.

While lending rates will mimic the policy rate moves and hence may see some further rise, we believe the 10-year bond yields, which focus more on the future direction of rates have probably peaked already.

How are earnings likely to pan out in 2023?
We believe India will be one of the few major economies which have decent earning growth visibility. We are looking at around 15% CAGR in earnings over the next three years.

Unlike the past year where the bulk of earning growth was led by commodity producers like Metals etc, earning recovery is likely to be broad-based.

As we have already hit unchartered territory – what is the kind of fundraising you see for IPO? Do you see more SME IPO to hit the Street?
I understand the market has made a new high, but that is the nature of the equity market. As companies continue to grow and earnings rise, markets will continue to make new highs. The right question to ask is if the markets are overvalued.

In our assessment, the market is trading at `19x 2024 EPS. While this is marginally higher than last 10-year average of 18x, this is a fairly acceptable range.

Coming to IPO, we had seen a lull in the IPO market post some mega issues earlier. Going ahead we will have an increased supply of paper. In addition to IPOs, we will also see some big-ticket divestment of PSUs like Hindustan Zinc, etc.

We do not track SME IPOs.

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?
We have seen a welcome increase in retail interest in equities. We see around 20 lakhs new Demat accounts every month. With a rising saving pool, we believe there will be structural growth in the Indian retail investor base.

Of course, there can be some cyclicality to the equity market performance, we are quite positive on this trend from a medium-term perspective.

Apart from direct retail investors, we have also started seeing consistent inflow from long-term pension funds like EPFO.

Both these can be a good stabilizer and counter-balance to volatile FII flows. It is good to see Indian retail investors participating in India's growth story.

Mutual Funds segment is likely to see good growth in 2023. What is your advice for first-time as well as seasoned investors?
As the saving pool rises, all financial products will see accelerated growth. Indian Mutual fund industry will also benefit from this trend. Mutual funds remain the lowest cost and easiest way to access the market.

Indian Equities are one of the promising asset classes from a medium to long-term perspective. However, it does come with its fair share of volatility. It is therefore very important to take at least 3–5 year view while investing in equities.

Do spend some time understanding your risk profile and time horizon. Take professional help if you can. Make the right allocation, and let the power of compounding work for you!

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