CONTRA INVESTMENT TO MAKE WEALTH FOR INDIAN INVESTORS IN 2023

 

 The biggest question in mind is how the Global Markets and Indian Markets will behave in the coming 6 months and what should be the investment strategy.  The global economy faces the biggest risk of sanctions which will be coming in 2023 due to the ongoing war between Russia and Ukraine. The war-based sanctions will play a key role in the economic uncertainties, global inflation, and most importantly the interest rate climate.

The recent market correction is due to the expectation of interest rates to come down from the 4^th quarter of the calendar year 2023. This is the very reason why S&P 500 went up until now from Jan 2023.

In 2010 when the US economy was printing money and was deploying the same job numbers, inflation, wage hikes, and unemployment both failed to get a boost up from such policy actions. 2023 we are just the mirror image of the same phase where interest rates are climbing up but inflation is not coming down, neither unemployment numbers are increasing nor wages are coming down. But the reason behind such things happening is that most of the US inventories are too high hence less working capital is required and hence less impact of the interest rate hikes. Further short-term rate hikes do not mean a change of plan for the long term since everyone in the US and across the globe knows that this rate of interest in not sustainable for the largest economy on the earth. Industrial inflation will be more governed through sanctions-based disruption in the supply chain.     On the other hand, china and the EU will drive the demand for global goods and services.  

On the other hand job numbers is not very clear to showcase the real economic impact due to the interest rates. High-paying jobs are getting replaced with low-paying jobs. The latest number for the month of Jan 2023 reflects that mostly the Hospital sector. 2/3 rd of the US are living paycheck to paycheck and around 40% struggling to pay bills. The household debt of the 4^th quarter of 2022 has gone by $ 394 billion adding to the $1.69 trillion. Credit cards went up $61 billion whereas mortgage balances are $11.92 billion which is a trillion-dollar increase for 2022. The younger generation is feeling the heat of interest rates. This number is only going to increase for limited quarters of the Calendar year 2023.

At the same time interest rate hike is going to again re-adjust the earnings outlook for the coming quarters. This will get reflected and absorbed by the market in the coming months which will get reflected in the stock price too.

India

Indian economy is already being warned of El Nino which will impact the agricultural sector and so as agri-based consumption and festive season consumption. In the past 22 years, there have been three instances — 2002, 2009, and 2015 — where rainfall deficit coincided with an El Nino event, leading to severe droughts in India.  The slowdown in consumption will impact sectors like auto, FMCG, and all those which are linked with agricultural income base consumption. We are witnessing a cut down in auto and FMCG already and the same will spill over in the coming months.  Tractors that play a pivotal role in agri sector will also witness a drop in sales if the El Nino impact leads to low rainfall and prolonged summer. Food inflation will also grow since crops will be damaged and the impact of the same is on household budgets which will further spill over to cut down on consumption in other areas impacting the market, sectors, and stocks.

From here we draw the conclusion that our investment allocation should now be focused on sector-based allocation moving away from the traditional mode of the investment thesis.  The government's aggressive allocation and expenditure towards the infrastructure will be a savior from the expected downfall calculation projected from El Nino. The railway sector allocation in the budget will create limited benefits for the private sector and individual stocks. But we will witness the growth of green shoots from PP projects in infrastructure.  Rising inflation and uncertainty in the job market will impact real estate consumption too. Buyers will mostly postpone buying opportunities. Post April we will see the forward outlook by the various industry leaders which will decide the course of action and strategy for investments and also investments allocation.

Indian Market Micro Numbers

In the last 10 years, it has been found that NSE 500 stocks surged to record highs. One-third of the companies are currently trading at a PE of more than 50 times. About 10% of the stocks in the NSE 500 universe trade at a PE of more than 100 times and 60% trade at a price to book of over 3 times with a median of 4.3 times. Nearly one-third of the companies are currently trading at a PE of more than 50 times. From FY10 to FY19, the EPS of Nifty 50 moved up from ₹257 to ₹460, a compound annual growth rate (CAGR) of 6.68%. From pre-pandemic (FY19) EPS of ₹460 to post-pandemic (FY22) EPS of ₹771, Nifty 50 clocked an impressive CAGR of 18.79%,  which is 3 times the long-term EPS growth of 6.68%.  

Investment Conclusion Strategy Based on Economy and Sector outlook:

Contra investments will be the best theme to create wealth in 2023 among so many uncertain outlook variables. It’s expected that manufacturing and domestic industrial demand will drive the growth and it will also balance the impact. Taking exposure and investment in auto, IT, FMCG, and that entire sector that will get impacted in the current 2023 will create significant wealth. Every investor will not be able to make an investment in 2023 since the year 2023 is also the year for testing how much capable the investors are to understand the hidden opportunities of investment.  Increasing to Large cap Investment allocation will be better in 2023 with marginal allocation in midcaps. The core portfolio should be aligned toward a large cap. The satellite one can have allocation in Large and Midcap and midcap. Avoid small caps even if they offer lucrative opportunities. Liquidity issues in rising interest rate scenarios would impact portfolio allocation in small caps.  The biggest point is that contra opportunities are enough provided clients understand and identify the same.