Banking sector to do reasonably well in 2023: Janakiraman R

"At the market level what happened in 2022 will have a bearing on the 2023 market returns. We had a very good year in 2022 but let us face the facts, in the near term we are likely to see a deceleration in the economy in fiscal 24 or calendar 23," says Janakiraman R, Franklin Templeton.

Let us start with your market view, it has been one of those years where the fear, macros, commodity everything was not in our favour yet markets are on course to give a positive return, why is that?
I think one of the factors that helped the Indian markets in calendar 22 was the relative performance. On an absolute basis, in terms of the internal macro numbers they were not great but on a relative basis if we compare India with some of the other countries whether it is emerging markets or developed markets, I think in many of the economic parameters our performance was much better in terms of growth, incremental inflation and earnings growth. So this is one of the reasons why the performance of India in calendar 22 despite reasonably modest internals was significantly better compared to other markets.

What do you think is in store for 2023? I am trying to understand the moot point here, let us say in 2021 it was fintech, tech, commodities, sectors which benefited because of low liquidity, come 2022 the reverse happened growth took a back seat value made a comeback whether it was NTPC, Coal India or PSU banks. So what is in store for 2023 because we know that market style changes?
At the market level what happened in 2022 will have a bearing on the 2023 market returns. We had a very good year in 2022 but let us face the facts, in the near term we are likely to see a deceleration in the economy in fiscal 24 or calendar 23. The growth differential between India and the other emerging markets is likely to come down, narrow a bit. The third is the fact that our valuations are still slightly above the long term average levels. Calendar 22 was a year where most of the other markets saw normalisation in valuation. Unfortunately we escaped that which helped us in 2022 but probably it is going to act has a handicap in 2023.

So I think in the near term we have to be a bit more cautious about the market returns. In contrast, the medium term outlook is distinctly positive, things like the capex cycle recovery, the real estate recovery, the China plus one development as far as industrial outsourcing is concerned, all these factors make the clear outlook much more positive. But that is tempered by the fact that I think the next six to 12 months we have to be a bit more careful or moderate about return expectations.


Financials clearly seem to be the sector but the problem is the divergence there. PSBs are doing one thing, some of the bigger banks are doing another and some of the bigger private sector banks have been underperformers. Will the underperformers match up with the PSB outperformance?
I think so. I think for calendar 23 the banking sector is likely to have a reasonably good strong performance. The more powerful factors like credit growth or the asset quality are going to facilitate the sector’s outperformance. Of course it will be dragged by things like rise in cost of funds or rise in opex structure but on the whole given the valuation levels are also attractive I think banking is one sector which I expect to do reasonably well in calendar 23.

If we look at PSBs and the private banks, see in round one what happens is the deeply undervalued stocks in the sector especially the PSU banks tend to get rerated in a quick timeframe that leads to some rapid returns.

But I think in round two you are likely to see capital raising from some of these PSU banks which will put some kind of a dampener in terms of incremental returns and then the earnings growth will start to take over and influence the returns much more.

So I expect more consistent return from the financial sector in 2023, not the skewed pattern that we saw in the last quarter of 2022. But as a whole I think this is one sector which I expect to do reasonably well in 2023.

What is the best way to play the capex revival theme, I mean, not to say that stocks have already not moved up within this big umbrella bunch but according to you in 2023 what within the capex large umbrella is going to work well?
See, the evidence so far on capex revival is a bit mixed. While there is an expectation amongst the investors that the capex cycle will revive, the evidence is positive on the short cycle order flows so far. But for the long projects, while we have seen reasonably large announcements in areas like green energy and decarbonisation opportunities we have not exactly seen much activity or investment on the ground.

So I would say that so far the trend is very positive for the short cycle players within the capex cycle, these are the companies that produce and sell components like mortars, bearings. For the short cycle items, the business will continue to exhibit strength into calendar 2023 also. This is a good sector to play, it is a bit pricy so we have to pick and choose our own areas of comfort in that.


What is the outlook when it comes to IT? Are you enhancing exposure here?
See it is a well debated question at this point of time and the debate got even more intense after Accenture results came out. From one perspective I think reasonable amount of uncertainty and doubt has already been built in the last one or two quarters. Returns on IT have been quite weak so to some extent that uncertainty has been built in. So from that perspective yes one can take a slightly more constructive view about IT.

But the biggest argument against that is a fact that even now the valuations in IT sector are meaningfully higher than the pre-COVID levels because of the very high rerating in valuations that IT sector saw during the COVID time and the normalisation is yet to happen. So that is what is holding me back from adopting a bit more constructive view about IT.

Wanted to understand that in light of where India stands at the current juncture the fact that a lot of experts have been alluding to the fact that we are a bright star among some of the other emerging markets? Where do you believe is the next long term tactical idea that can provide strong returns?
Clearly there are one or two sectors that come to my mind which I think are good enough to deliver reasonably good returns to investors. One is electronic manufacturing. It is a globally large opportunity and it is also a play in terms of labour cost arbitrage. While we have this advantage in terms of labour cost for a long time there were some other factors where we were not up to the mark I think those deficiencies have been compensated or addressed now. So EM is an opportunity where I expect reasonable amount of traction. We have a few companies that are listed in this space. Probably a few more will come to the market over the next one or two years. Most of these companies were in either the small or the midcap segment but I do think that these companies will scale up quite meaningfully over the next three year-four years. So this is one sector where I think the next cycle is going to function quite well.

The other sector which I am positive on is the real estate sector. I think the post COVID demand recovery continues to hold firm. Unsold inventory numbers have come down to really low levels which means that finally we are seeing some asset price appreciation that is happening across the country.

So I think the demand will continue here and this is a sector again which can help immensely in the overall macro growth as well as corporate earnings. So this is again one sector where I expect reasonably good performance over the next two years or so.

What are your views about NBFCs and housing finance companies?
Housing finance is a derived activity so if the real estate cycle is slowing, you will see a reasonable amount of demand for housing finance also slowing down.

This is an intensely competitive sector. Banks play a large role here so the role of NBFCs progressively is becoming a bit more limited as far as housing finance is concerned. But still the opportunity is large enough so clearly next two to three years housing finance will offer good opportunities for NBFCs who are very clear about their strategy on which pocket of the market to address and who have the requisite skill set in order to address those opportunities.

Also, I think clearly the discretionary demand which was bit on the weaker side in calendar 2022, one can expect a revival in 2023. One of the thesis that floated around after COVID was the fact that we are having a K-shaped recovery and the economically weaker sections of the society saw some bit of damage to their personal balance sheet and it took some time for repairing their balance sheet.

I think that is what dampened the discretionary demand but I think there the trend is changing. The fact that asset quality numbers are looking very strong especially the high yield credit segment means that the balance sheet repair is almost near its end even for the economically weaker sections of the society.

This leads me to infer that perhaps the discretionary demand also from that segment will start reviving so we can expect some revival in 2023 for the front end activities which were bit more weaker in 2022.

I am looking at the portfolios which you manage and since it is a declared portfolio we get access to what you have added and what you have deleted as for the last sum total of the portfolio which you manage. I can see a PB Fintech has moved in, I can see there is a Zomato and I can see the new tech is where you are taking bets. Is this more like a one of those small testing bets which you have taken or you are convinced that two year out-three year out there could be lot of volatility and this year and next year prices may swing 40-50%. Do you feel convinced about betting on some of them, are you catching them young and see them grow?
Yes, so at the time of IPO I do not think we have enough information to build a very comprehensive investment case about some of these businesses. Post IPO with each passing quarter the available set of information is expanding so one can take a bit more considered or slightly comprehensive view. While some of them may be tactical I think there is now enough information to build a longer term case in some of the companies especially the names that we mentioned.

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